Hong Kong: More Flexibility for a Streamlined Approach to Conducting Suitability Checks on Sophisticated Professional Investors

The Securities and Futures Commission and the Hong Kong Monetary Authority issued a joint circular on 28 July 2023 setting out procedures that intermediaries can streamline (Streamlined Approach) for compliance with suitability obligations when dealing with sophisticated professional investors (SPIs).

In essence, under the Streamlined Approach, an intermediary may execute investment transactions for an SPI without matching, at a transaction level, the SPI’s risk tolerance level, investment objectives and investment horizon, or assessing the SPI’s knowledge, experience and concentration risk. 

Who are SPIs?

SPIs are Individual Professional Investors who possess higher levels of net worth and knowledge or experience. To qualify, an SPI should have:

• A portfolio of at least HK$40 million; or net assets (excluding primary residence) of at least HK$80 million.
• Either a degree in accounting, economics or finance; professional qualification in finance; at least one-year work experience in a professional position in financial sector; or executed at least five transactions within the past three years in the same category of investment products (through itself, power of attorney or transactions executed in joint accounts).

A corporation wholly owned by one or more SPIs, which has as its principal business the holding of investments, may be treated in the same manner as SPIs. 

However, conservative clients whose investment objective is capital preservation and/or seeking regular income should not be treated as SPIs, despite meeting SPI qualification criteria.

SPI's Choice of Products and Threshold

Investment products are required to be categorised based on their terms and features, characteristics, nature and extent of risks (Product Categories) – for instance, accumulators/decumulators; collective investment schemes; debt instruments with loss-absorption features; and virtual assets.

The SPI should specify the choice of Product Categories and maximum investment threshold (Threshold) within which investment transactions could be executed under a Streamlined Approach.

The Threshold representing overall exposure limit can be specified either as an absolute amount or a percentage relative to the SPI’s assets under management with the intermediary. 

The Intermediary should document the choice and provide a Product Category Information Statement to the SPI explaining terms and features, characteristics, nature and extent of risks of investment products within each Product Category – including a warning statement in relation to the distribution of any complex products selected by the SPI.

In monitoring compliance with the Threshold, the intermediary is required to establish effective systems and controls to ensure gross exposures (including the effect of leverage) arising from investment transactions executed under a Streamlined Approach remain at or below the SPI’s specified amount.

Prior to applying the Streamlined Approach, a written agreement setting out the SPI’s consent, choice of Product Categories and Threshold should be entered into. 

Streamlined Approach

Under the Streamlined Approach, intermediaries can execute investment transactions for an SPI if they fall within the Product Categories and the Threshold specified by the SPI. In doing so, intermediaries are NOT required to: 

• Match the SPI’s risk tolerance level, investment objectives and investment horizon with the transactions. 
• Assess the SPI’s knowledge and experience, and concentration risk in the transactions. 
• Provide product explanation, except upon request or if the SPI raises material queries (although intermediaries should provide the SPI with the product offering document).
• Maintain records documenting the rationale underlying investment recommendations made to the SPI (for transactions with recommendation or solicitation).
• Perform product due diligence for investment products (for transactions in a complex product without recommendation or solicitation), although intermediaries should prepare and provide summaries of key terms and features of the investment product where offering document is not available to the SPI.

Takeaway 

This new Streamlined Approach is welcome as it recognises that for certain high net worth sophisticated clients with a high degree of knowledge or experience, the ability to determine their risk exposure at product level – and grant appointed intermediaries the freedom to build a portfolio reflecting these choices without the need for constant communication and form filling – is an attractive proposition. 

Such clients have the financial expertise to make these types of informed decisions, and the financial means to absorb the vagaries of the markets.

This new flexibility will undoubtedly also be welcome by intermediaries such as private banks, as it provides them the ability to respond rapidly to market opportunities and move SPI clients in and out of agreed Product Categories swiftly to capture dynamic opportunities.