Joint circular to intermediaries Streamlined approach for compliance with suitability obligations when dealing with sophisticated professional investors

The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) have released a joint circular addressed at financial market intermediaries regarding their compliance with suitability obligations when dealing with sophisticated professional investors (SPIs) who possess substantial net worth and financial expertise. In this circular, both regulators seek to clarify some issues in this context, thereby noting the following:
Suitability assessments involve matching investment products with a client’s circumstances and risk tolerance. In December 2020, the HKMA and SFC updated guidance to clarify the standards for conducting suitability assessments and disclosing product information to clients with varying financial sophistication (please see EventID 9154 for more information). The updated guidance allows intermediaries to tailor procedures for SPIs, using a streamlined and risk-based approach. If an intermediary determines that a client qualifies as an SPI based on existing information, the Streamlined Approach lets the SPI allocate funds for a diverse investment portfolio, including higher-risk products. In such cases, the intermediary is not required to match the SPI’s risk preferences or assess its knowledge at the transaction level each time a security trade takes place. Nonetheless, intermediaries must maintain proper conduct standards and risk management systems to prevent misuse and detect issues related to the Streamlined Approach.
The regulators have also enclosed two documents to provide further clarity, namely:
(1) Frequently Asked Questions on streamlined approach for compliance with suitability obligations when dealing with sophisticated professional investors:
This document contains a summary of questions the regulators have received in connection with the streamlined approach and provides answers to such. The FAQs thereby cover a large variety of issues ranging from the application of the process to clients with appointed representatives, to evidence that may or may not be required by intermediaries to assess a client’s financial expertise and net worth, to considerations for the setting of the streamlining threshold.
(2) Guidance on the „Streamlined approach for compliance with suitability obligations when dealing with sophisticated professional investors:
This document provides further guidance on the application of the streamlined approach towards clients. Specifically, the document outlines
– the criteria clients must meet to be considered for the streamlined approach (e.g. financial resources requirements, knowledge and competence requirements, etc.);
– limitations and restrictions with respect to the transactions that may be performed by SPIs under the streamlined approach;
– procedures to be followed by intermediaries to identify „eligible“ financial transactions such as product classifications and the setting of above noted threshold; and
– the requirements of intermediaries in the application of the streamlined approach, e.g. with respect to the assessment of suitability at transaction level, the documentation of customer due diligence, or the regular review of a customer’s skill and new worth assessment.