Circular to Licensed Corporations and Registered Institutions - Timetable for implementation of the new Professional Investor Regime

21 Mar 2016



New Professional Investor Regime

As set out in the Consultation Conclusions on the Proposed Amendments to the Professional Investor Regime and Further Consultation on the Client Agreement Requirements published on 25 September 2014 (the new Professional Investor Regime), a new paragraph 15 of the Code1 in relation to Professional Investors will come into effect on 25 March 2016.  This reform ensures that specified categories of professional investors2 who, previously, were not covered by important Code protections will be covered from this date.  A key objective is to ensure that these protections extend to all individual clients of intermediaries (including those who use corporate vehicles) regardless of their financial resources.

This means that intermediaries will, among other obligations, be bound by the Suitability Requirement3 in relation to these clients. Intermediaries will also need to enter into a written client agreement and provide relevant risk disclosure statements4.

New Client Agreement Requirements

Separately, as set out in the Consultation Conclusions on the Client Agreement Requirements published on 8 December 2015 (the new Client Agreement Requirements), intermediaries must comply with important new Code requirements governing the contents of all client agreements (new paragraphs 6.2 and 6.5 of the Code), including incorporation of the following new clause:

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.”

Intermediaries are reminded that all client agreements must be in compliance with the new Client Agreement Requirements on or before 9 June 2017.  However, it is expected that intermediaries should be able to comply with these requirements for the vast majority of clients well before that date.  The 18-month transitional period from 8 December 2015 to 9 June 2017 is to give intermediaries sufficient time to amend their client agreements and then to enter into these agreements with all of their existing clients, recognising that for some clients there may be practical difficulties in completing this process in a short period.

Synchronised Implementation Timetables

As mentioned above, the new Professional Investor Regime requires client agreements to be entered into with affected clients as one element of the package of measures which will take effect on 25 March 2016.  In addition, the new Client Agreement Requirements require intermediaries to enter into new or amended client agreements to incorporate the new clause set out above and to ensure that all agreements comply with new paragraph 6.5 of the Code, in this case before 9 June 2017.  In order to address these overlapping implementation periods for amending and entering into revised client agreements, the SFC has decided to synchronise the implementation timetables for both so as to avoid, as far as possible, the need for client agreements to be re-executed more than once.  This means that:

  1. the only element of the new Professional Investor Regime in respect of which intermediaries will be given additional time to comply is the requirement to enter into a written client agreement and provide relevant risk disclosure statements under new paragraph 15.4(b) of the Code;

  2. accordingly, save as specified in paragraph (1) above, all other provisions of new paragraph 15 of the Code implementing the new Professional Investor Regime will still come into effect on 25 March 2016, including the Suitability Requirement; and

  3. the extension of time specified in paragraph (1) above will be subject to the same 9 June 2017 deadline as the existing implementation period for the new Client Agreement Requirements.  As is the case in relation to the new Client Agreement Requirements, the SFC expects that intermediaries should be able to comply well before that date, and in all cases send amended client agreements and risk disclosure statements in compliance with the new Professional Investor Regime and the new Client Agreement Requirements to clients as soon as possible, and follow up with an active programme to ensure that these documents are executed, acknowledged by and explained to clients shortly thereafter.

Synchronisation of these implementation timetables (i) assists intermediaries and clients by reducing instances where client agreements may need to be re-executed more than once, and (ii) is consistent with the SFC’s investor protection objectives because a principal aim of the new Professional Investor Regime is to ensure that the Suitability Requirement applies to those categories of clients who will no longer be treated as “Professional Investors” under the Code.  The effective date for the latter change will remain 25 March 2016.

Should you have any queries regarding the contents of this circular, please contact Ms Pauline Chan at 2231 1952.

Intermediaries Supervision Department
Intermediaries Division
Securities and Futures Commission

End

SFO/IS/010/2016

1 Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission
2
Individual Professional Investors and Corporate Professional Investors who do not meet the criteria set out in the new paragraphs 15.3A and 15.3B of the Code
3
Paragraph 5.2 of the Code
4
Paragraph 6.1 of the Code


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Page last updated : 21 Mar 2016