What You Need to Know: HKMA and SFC’s “Streamlined Approach for Compliance with Suitability Obligations When Dealing with Sophisticated Professional Investors”

In the joint circular, "Streamlined approach for compliance with suitability obligations when dealing with sophisticated professional investors"¹, the regulators acknowledged the concerns raised by intermediaries regarding compliance with suitability obligations when dealing with SPIs possessing significant net worth and expertise.

The concerns pertain to suitability assessment and product disclosure processes, and to address these concerns, a Streamlined Approach has been introduced, enabling intermediaries to use client onboarding data for SPI identification. SPIs are allowed to invest across diverse risk-return profiles without requiring detailed risk evaluations. Nevertheless, intermediaries remain responsible for upholding conduct standards and risk management, necessitating robust controls to prevent the misuse of the Streamlined Approach.

This approach aims to simplify the point-of-sale process and enhance the overall client experience for SPIs.

SPIs must meet specific criteria related to the financial situation, knowledge or experience, and investment objectives. This includes:

Financial situation:
Possessing a portfolio of at least HKD 40 million or net assets (excluding primary residence) of at least HKD 80 million.

Knowledge or experience:
Having the degree of sophistication required to understand the risks arising from being treated as an SPI and meet at least one of the following criteria:

• Holding a degree or post-graduate diploma in accounting, economics, finance, or a related discipline
• Having attained a professional qualification in finance
• Having at least one-year relevant work experience in a professional position in the financial sector
• Having executed at least five transactions within the past three years in the same category of investment products

Investment objectives:
Are not conservative clients whose objectives are capital preservation and/or seeking consistent income.

Intermediaries can only execute investment transactions for SPIs under the Streamlined Approach if the transaction falls within the specific Product Categories and streamlined thresholds chosen by the SPI.

For Product Categories, intermediaries must:

• Categorise investment products based on the terms and features, characteristics, nature, and extent of the investment product’s risks
• Document the choice of the SPI’s Product Category
• Provide a Product Category information sheet, including warning statements regarding the distribution of complex products, and explain upon request
  

For Streamlined Threshold, intermediaries must:

• Establish a maximum investment threshold as an absolute amount or a percentage of the assets under management (AUM)
• Maintain proper records of streamlining and rationale specified by the SPI
• Establish and maintain effective systems and controls to ensure compliance with the threshold
• Implement measures to detect outsize or material transactions and issue warning statements
• Review compliance on an annual basis and alert the SPI when Streamlining Threshold is exceeded

Intermediaries are NOT required to:

• Perform product due diligence
• Match the SPI’s risk tolerance level, investment objectives, and investment horizon
• Assess the SPI’s knowledge and experience, and concentration risk
• Provide product explanation, except upon request
• Provide warning statements on a transaction-by-transaction basis

A. SPI assessments:

• Intermediaries should be reasonably satisfied that the SPI meets the qualifying criteria
• Have proper documentation of assessment and relevant documents
• Maintain records of correspondences with SPI on choice of Product Categories and setting of Streamlining Threshold

B. Client acknowledgement:

• Obtain written agreement and consent to be treated as an SPI
• Specify investment transactions to be excluded under the Streamlined Approach
• Fully explain the consequence of being treated as an SPI and their right to withdraw from being treated as such at any time

C. Annual review:

• Ensure that SPIs still meet qualifying criteria
• Remind SPIs in writing:
  • The consequences of being treated as an SPI
  • The Product Categories and Streamlining Threshold specified by the SPI
  • The right to withdraw from being treated as an SPI, to add or remove a Product Category and/or amend Streamlining Threshold at any time

To help navigate the new guidelines laid out by the regulators, we recommend the following:

1. Performing a gap analysis between existing practices and Streamlined Approach
   Facilitate the prompt identification of necessary improvements for a smooth and efficient implementation of changes.
   
2. Refine existing investment suitability frameworks
   Enhancing current investment suitability frameworks involves establishing thorough controls to identify significant transactions in accordance with the Streamlining Threshold.
   
3. Integrate market best practices
   Select a suitable partner to ensure your organisation’s capacity to recognise and adopt the most effective market practices. This approach ensures adaptability to evolving conditions and sustained market competitiveness while adhering to 4regulatory mandates.
   

Speak with our experts to find out more about the industry’s best practices and what your organisation should do to ensure adherence to the latest regulatory requirements and effective risk management.

¹ HKMA and SFC. Joint circular to intermediaries: Streamlined approach for compliance with suitability obligations when dealing with sophisticated professional investors. 28 July 2023.