December 2015
Practice Group:
SFC Published the Consultation Conclusions on the
Client Agreement Requirements
Investment
Management
By Michael P. Wong
Global Government
Solutions
Introduction
On 8 December 2015, the Securities and Futures Commission of Hong Kong (the “SFC”)
released the “Consultation Conclusions on the Client Agreement Requirements”
(“Consultation Conclusions”), in which the SFC has resolved to proceed with the proposal
to require the incorporation of a new clause into client agreements. (The full version of the
Consultation Conclusions can be viewed at
http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/conclusion?refNo=14CP7.) The
new clause primarily relates to the requirement for financial products solicited or
recommended to be ‘reasonably suitable’ (“Suitability Requirement”) pursuant to the “Code
of Conduct for Persons Licensed by or Registered with the SFC” (“Code of Conduct”).
It is advisable for SFC licensed and registered entities, including but not limited to product
distributors, fund managers, securities brokers and investment advisers (“Intermediaries”) to
be mindful of the Consultation Conclusions and take steps to comply with this additional
requirement in the Code of Conduct.
Background
On 25 September 2014, the SFC published Consultation Conclusions on the Proposed
Amendments to the Professional Investor Regime and Further Consultation on the Client
Agreement Requirements, inviting public comments on the following proposed clause to be
incorporated into client agreements:“If we [the intermediary] solicit the sale of or recommend any financial product to you [the
client], the financial product must be reasonably suitable for you having regard to your
financial situation, investment experience and investment objectives. No other provision of
this agreement or any other document we may ask you to sign and no statement we may ask
you to make derogates from this clause.” (“New Clause”)
There were substantial submissions made on the language of the New Clause, namely (1)
wordings in relation to “solicit” and “recommend”, (2) the definition of “financial product”, (3)
the standard of “reasonably suitable” , (4) the Intermediaries’ knowledge of clients’ personal
circumstances and (5) “non-derogation” component of the New Clause. The SFC’s
responses to these comments are set out below:
Wordings in relation to “Solicit” and “Recommend”
It was suggested that the definitions of “solicit” and “recommend” were unclear and broad,
and thus these terms should be deleted. The SFC responded in the Consultation
Conclusions that these terms are consistent with the Suitability Requirement that
SFC publishes the Consultation Conclusions on the Client
Agreement Requirements
Intermediaries are well familiar with as these terms have been used in the Code of Conduct
for a number of years. The SFC further stated that given that non-compliance of the Code of
Conduct allows the SFC to take disciplinary actions against Intermediaries, the purpose of
the incorporation of the New Clause into client agreements is to enable aggrieved investors
to directly seek redress against the Intermediaries as a contractual claim for damages. It
follows that the New Clause should retain the same main features as in the Suitability
Requirement, which include the same trigger for its applicability, namely “solicitation” of the
sale and “recommendation” of any financial product to clients.
The Definition of “Financial Product”
The definition of “financial product” is also clarified in the Consultation Conclusion.
Paragraph 6.2(i) of the Code of Conduct will be amended to clarify that the term “financial
product” refers to any “securities, futures contracts or leveraged foreign exchange contracts
as defined under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong
Kong)”.
The Standard of “Reasonably Suitable”
It was remarked that whether a financial product is “reasonably suitable” is open to varying
interpretation. However, the SFC maintained its position that such objective standard would
not require further clarification as it would be the usual standard that a court would readily
interpret and apply in the prevailing circumstances.
The Intermediaries’ knowledge of clients’ personal circumstances
In connection with the suggestion that the liability should be premised on the actual
knowledge of the clients’ personal circumstances, the SFC in the Consultation Conclusions,
referred to the “Know Your Client” requirement in the Code of Conduct where Intermediaries
shall take “all reasonable steps” to establish “true and full identity” of clients, and his
“financial situation, investment experience and investment objectives”. However, the SFC
expressed in the Consultation Conclusions that a client pursuing a claim against an
Intermediary will not successfully discharge his burden to establish his case if false or
misleading information is provided to the Intermediary and it is not reasonable for the
Intermediary to discover as such.
“Non-derogation” component of the New Clause
Some respondents proposed that the non-derogation component be deleted since it does not
foster harmonious relationships with clients. However, the SFC considered that the
significance of retaining this component is to impose a contractual obligation on
Intermediaries not to incorporate disclaimers which defeat the purpose of the New Clause or
override other fundamental provisions of the Code of Conduct.
Applicability of the Suitability Requirement into client agreements
It should be noted that all Intermediaries are obliged to include the New Clause in client
agreements, as the SFC considered allowing certain specific types of Intermediaries to opt
out the New Clause may lead to inconsistent application and unequal protection to investors.
However, there are circumstances as set out in the Consultation Conclusions where the
incorporation of the New Clause may not be necessary. These are set out below.
2
SFC publishes the Consultation Conclusions on the Client
Agreement Requirements
i.
Pursuant to paragraph 6.4 of the Code of Conduct, client agreements might be
limited to the service provided accordingly. It follows that inclusion of the New Clause
might not be necessary when an Intermediary acts under a restricted mandate that
clearly does not involve soliciting the sale or recommending the financial products.
ii.
Under the new professional investor regime to be effective on 25 March 2016,
Intermediaries dealing with “Institutional Professional Investors” or “Corporate
Professional Investors” have the discretion not to enter into a client agreement. (For
more details on the new professional investor regime, please refer to the client alert
entitled “SFC Guidance on Corporate Professional Investors Assessment and
Description of Services in Client Agreements” which is available at
http://www.klgates.com/sfc-guidance-on-corporate-professional-investorsassessment-and-description-of-services-in-client-agreements-01-28-2015/ .) The
SFC took the view that even if a client agreement is entered into with these
professional investors, an Intermediary is not obliged to include the New Clause.
The Way Forward
Following the Consultation Conclusions, the requirement to incorporate the New Clause will
be added as 6.2(i) of the Code of Conduct. The SFC will also insert a new paragraph 6.5 to
the Code of Conduct, which precludes the incorporation of any clause, provision or term
which is inconsistent with obligations of the Code of Conduct or mis-describes the actual
services to be provided to clients in the client agreements. The above amendments to the
Code of Conduct will come into effect 18 months after the date of releasing the Consultation
Conclusions (i.e. 8 June 2017). In light of the tight timeframe, it is advisable for
Intermediaries to commence review of their client agreements and ensure that they comply
with these new requirements by 8 June 2017.
Authors:
Michael P. Wong
michael.wong@klgates.com
+852.2230.3529
Anchorage
Austin
Fort Worth
Frankfurt
Orange County
Beijing
Berlin
Harrisburg
Palo Alto
Paris
Boston
Hong Kong
Perth
Brisbane
Houston
Pittsburgh
Brussels
London
Portland
Charleston
Los Angeles
Raleigh
Charlotte
Melbourne
Research Triangle Park
Chicago
Miami
Dallas
Milan
San Francisco
Doha
Newark
São Paulo
Dubai
New York
Seattle
Seoul Shanghai Singapore Sydney Taipei Tokyo Warsaw Washington, D.C. Wilmington
K&L Gates comprises approximately 2,000 lawyers globally who practice in fully integrated offices located on five
continents. The firm represents leading multinational corporations, growth and middle-market companies, capital
markets participants and entrepreneurs in every major industry group as well as public sector entities, educational
institutions, philanthropic organizations and individuals. For more information about K&L Gates or its locations,
practices and registrations, visit www.klgates.com.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in
regard to any particular facts or circumstances without first consulting a lawyer.
© 2015 K&L Gates LLP. All Rights Reserved.
3