On 8 December 2015, the Securities and Futures Commission (“SFC”) of Hong Kong published its “Consultation Conclusions on the Client Agreement Requirements” (“Consultation Conclusions”), requiring licensed financial intermediaries to include a new clause in their client agreements on the suitability of investment recommendations and solicitations.
The required new clause reads:
“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.”
The SFC’s “Code of Conduct for Persons Licensed by or Registered with the SFC” will be amended to incorporate this minimum content requirement for client agreements. In addition, a new paragraph will also be inserted into the Code of Conduct to disallow any contractual term or provision in the client agreement or other document signed or statement made by client at the request of the intermediary which is inconsistent with the Code of Conduct obligations or which misdescribes the actual services provided to a client.
There is an 18 months transitional period (i.e. 9 June 2017 being 18 months from 8 December 2015) for all intermediaries to comply with the new requirements, although the SFC expects that “all intermediaries will commence reviewing and revising their client agreements immediately, as well as to make revised client agreements available as soon as possible so that new clients can execute them and existing clients can amend or replace their existing agreements.”
The intended effect of the new requirements is that banks and other financial intermediaries will now be under a contractual obligation on suitability of investment recommendations and solicitations of financial products, and will no longer be able to use non-reliance clauses as a defence to a mis-selling claim.
As set out in the SFC’s response in the Consultation Conclusions:
“The New Clause is derived from the Suitability Requirement under the Code, which is the cornerstone of investor protection. This requirement has been in place for many years and intermediaries should be fully aware of their compliance obligations under it. However, because the Suitability Requirement is limited to being a regulatory obligation, the SFC can only take disciplinary action against the relevant intermediary which has breached it; it cannot require the intermediary to compensate aggrieved investors from losses arising from such breach. The New Clause aims to enable aggrieved investors to seek redress as a contractual right under the client agreement in such a situation.”
Implications of the New Clause
As a result of the new clause now required, investors may now seek to rely on the client agreements to seek redress against banks as a contractual right. The new clause imposes contractual obligations on banks and intermediaries on suitability of investment recommendations and solicitations (as opposed to only regulatory obligations under the Code of Conduct). By also requiring no other terms or provisions in the contract may derogate from this contractual obligation, banks and financial intermediaries may no longer be able to rely on non-reliance clauses as an estoppel to limit their duties and obligations to investors.
Instead, the focus of attention on any potential claims brought by investors will shift to the actual issue of suitability of the financial products which have been sold to them by the banks and/or intermediaries. As the phrase “reasonably suitable” is an objective standard, it will be decided by the Court as to the particular facts of each case in applying the standard to the prevailing circumstances. The SFC has also stated that any future Court decisions would constitute referable guidance on the interpretation of the suitability obligations under the new clause, which the SFC will take into account as precedents.
The new requirements should also be considered in the context of expanded requirements with respect to certain categories of “professional investors”. While the suitability requirement has always applied to retail clients (i.e. “non-professional investors”), with effect from 25 March 2016, the suitability requirement will also apply to (a) professional investors who are individuals, and (b) certain trusts and corporate investors (e.g. those not engaged in investment activity in business and not qualified under an assessment on the knowledge, experience and investment process). Correspondingly, while it was previously possible to be exempted from a need to enter into a client agreement when dealing with “professional investors”, with effect from 25 March 2016, the exemption will no longer apply for such categories of individual professional investors and corporate professional investors.
The issues of suitability and mis-selling continue to be in regulatory focus. In Hong Kong, a series of measures to enhance protection for the investing public was first rolled out in May 2010, including the introduction of the requirement that financial intermediaries should assess a client’s knowledge of derivatives which impacts the suitability standard to be applied. Hong Kong regulators have since further reviewed requirements on suitability assessment and selling practices on investment products, and made significant changes to the professional investors’ regime which will be effective 25 March 2016. In the latest development, intermediaries will now be required to include a contractual duty on suitability in client agreements. On the other hand, in recent years there have been a number of court decisions in the UK, Hong Kong and Singapore on claims of mis-selling of financial products by banks.
For an overview of the key developments and requirements in Hong Kong on the subject, together with an analysis on notable case law as background to this development, please refer to our article –
