Securities & Futures Commission of Hong Kong

Frequently Asked Questions on Triggering of Suitability Obligations

Q1:

When will interactive communications between licensed or registered persons and their clients about investment products1 trigger suitability obligations?

A:

Interactive communications between licensed or registered persons and their clients about investment products may occur in different forms (eg, face to face communication, phone conversation and electronic communication or a combination of any such forms).  Whether an interactive communication between a licensed or registered person and a client about an investment product triggers the suitability obligations would depend on whether there is solicitation or recommendation having regard to the facts and circumstances of each case. 

General guiding principles

Determining the facts and circumstances requires an analysis of the content and context of each interactive communication (eg, message and materials (if any) sent to a client) as well as other relevant factors.  These factors include but are not limited to the following: 

  1. The content and context of the communication with a client, eg, whether the communication is limited to the provision of factual, fair and balanced information about a product, information about a market or an industry, or whether it contains a representation involving an invitation or inducement to act on it and invest in a particular product;
  2. Whether the communication is delivered to targeted clients; and
  3. The series of actions taken, eg, whether the communication forms part of a multiple-step solicitation or recommendation process and hence triggers the suitability obligations. 

These factors may be interrelated and have to be taken into consideration in totality.  For example, if after the wide dissemination of a research report on a listed stock, the licensed or registered person makes a follow-up call to a client and recommends the client to buy or sell that product, this is likely to trigger the suitability obligations.  Similarly, by communicating a short list of investment products for a client to consider and subsequently suggesting that the client places an order via its online trading platform, this is likely to trigger the suitability obligations and the licensed or registered person would need to ensure that the suitability obligations have been discharged.  

Specific examples

To facilitate licensed or registered persons in applying the above general guiding principles, a non-exhaustive list of scenarios illustrating when the suitability obligations are likely or unlikely to be triggered during interactive communications between licensed or registered persons and clients about investment products are set out in the Annex.

For example, if a licensed or registered person merely executes an order from a client without any other communication that seeks to solicit or recommend the client to trade in a particular investment product, this is unlikely to trigger the suitability obligations.


Annex 

Licensed or Registered Persons’ Interactive Communications with their Clients

1. Examples illustrating when suitability obligations are UNLIKELY to be triggered

  1. Execution of an order from a client only without any other communication that seeks to solicit or recommend the client to trade in a particular listed stock.

  2. Discussion with a client on overall market environment, industry, sector trends or general financial and investment information.  General financial and investment information includes basic investment concepts such as risk and return of an asset class, differences in returns of asset classes (bonds, equities) etc.

  3. Provision of factual information about a specific listed company to a client, eg, corporate news or announcements of a listed company and its financials such as earnings growth trend or, P/E ratio, without any prior communication or any accompanying message which seeks to solicit or recommend the client to trade in the company’s stock.

  4. Provision of factual information about specific fund(s) or bond(s) at a client’s request, eg, prospectuses, fact sheets, annual reports and price quotations for the products, without any prior communication or any accompanying message which seeks to solicit or recommend the client to trade in the specific fund(s) or bond(s).

  5. Discussion with a client on the merits of investing in certain geographical areas or asset classes only.

  6. Provision of alerts to a client upon his or her request when there are updates of certain factual information about a listed company, eg, a particular stock reaches a certain price, without any prior communication or any accompanying message which seeks to solicit or recommend the client to trade in that stock.

2. Examples illustrating when suitability obligations are LIKELY to be triggered

  1. After provision of factual information about a listed company to a client, following up with a call to the client and recommending the client to buy or sell that stock.

  2. Discussion with a client or a selected group of clients on the merits of a particular investment product or a portfolio of investment products and presenting the investment product or portfolio implicitly or explicitly as suitable for the client(s).

  3. Any communication that may be perceived to be based on consideration of the circumstances of the client (eg, risk appetite) to invest in a particular investment product. 

  4. During any fund raising activity of a listed company or listing applicant, calling a client and recommending the client to buy the company’s stock. 

  5. Shortlisting of investment products based on the circumstances of a client (eg, risk appetite) and providing factual information about the shortlisted investment products to the client.

  6. Having regard to the personal circumstances of a client, finding or structuring an investment product based on parameters or specifications provided by the client.

Q2:

Are suitability obligations applicable when licensed or registered persons provide discretionary account services to their clients?

A:

Yes.  Licensed or registered persons that provide discretionary account services to their clients (which involves the making as well as execution of recommendations) should comply with the suitability obligations under the Code of Conduct2 supplemented by the relevant FAQs3 and circulars issued by the SFC from time to time4.

Q3:

How should licensed or registered persons comply with the suitability obligations when they provide discretionary account services to clients?

A:

Depending on the mode of operations of a licensed or registered person and the specific agreement with a client, the licensed or registered person may have a greater or lesser discretion to trade in investment products on behalf of the client without the client’s specific authorization.  In general, there are two main types of discretionary account services.  Some licensed or registered persons may manage a client’s portfolio in accordance with a mandate5 or a predefined model investment portfolio6 established or chosen by the client.  Some of them may only provide discretionary account services as an ancillary part of their brokerage services for clients without any such mandate.    

Where a licensed or registered person provides discretionary account services to a client in accordance with an agreed mandate or a predefined model investment portfolio established or chosen by the client, the licensed or registered person’s obligations could be further discharged as follows:

  1. The licensed or registered person should ensure that the mandate or predefined model investment portfolio established or chosen by the client is suitable for that client based on information about the client’s personal circumstances of which it is or should be aware through the exercise of due diligence.  Such suitability assessment could be conducted on a holistic basis when the mandate or portfolio is agreed (eg, in establishing a predefined model investment portfolio with a particular overall risk profile, the licensed or registered person could have the discretion to invest in products with a lower or higher risk profile so long as the overall risk profile of the portfolio is maintained).  The licensed or registered person should document its assessment and provide a copy of the rationale to the client in writing. 
  2. Transactions effected on behalf of the client should be conducted in accordance with the agreed mandate or predefined model investment portfolio.  For any transaction subsequently effected in accordance with the mandate or predefined model portfolio, it would not be necessary for the licensed or registered person to record contemporaneously the rationale of each transaction or to provide the clients with the rationale of its recommendation for that transaction.
  3. If after a mandate or predefined model investment portfolio is agreed and during the course of the investment management relationship, the client raises any material queries about specific products in the portfolio or about the portfolio’s composition, the licensed or registered person should document such queries and responses.
  4. The licensed or registered person should review the mandate or predefined model investment portfolio on a regular basis (eg, on an annual basis or where there have been significant market movements), having regard to the client’s latest circumstances and where appropriate recommend revisions to the mandate or predefined model investment portfolio and agree them with the client.  The licensed or registered person should also document the rationale for recommending the revised mandate or predefined model investment portfolio and provide a copy of the rationale to the client in writing.

For the purpose of complying with the suitability obligations, given that a licensed or registered person that provides discretionary account services to a client will be making investment decisions on the client’s behalf, it would not be mandatory for the licensed or registered person to provide prospectuses or other product information to the client for each and every investment decision made on behalf of the client.

Licensed or registered persons that provide discretionary account services to a client as an ancillary part of their brokerage services for clients without any agreed mandate are required to follow the documentation requirements set out in the Suitability FAQs for compliance with the suitability obligations.

1 These cover both exchange traded products and non-exchange traded products.  For the purpose of these FAQs, non-exchange traded products include products sold over the counter and products which may be listed but the trading of which is executed outside an exchange.
2 Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission
3 See the Circular on "Frequently Asked Questions on Compliance with Suitability Obligations” issued by the SFC on 23 December 2016 (Suitability FAQs)
4 For the avoidance of doubt, licensed or registered persons should also comply with the relevant requirements governing the management of discretionary accounts under the Code of Conduct, the Fund Manager Code of Conduct and the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the Securities and Futures Commission.
5 For example, some mandates may set out, among others, the types, risks and allocation of investments after taking into account the client’s investment objectives and other circumstances.
6 A predefined model investment portfolio may specify the proportion of the asset classes and markets and the risk profile of the selected portfolio.

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