Dealing vs Advising

"Dealing" and "advising" are two terms in SFO which are often confusing people. If we simply rely on the common sense, then of course dealing means you enter into an agreement to buy and sell investment products for your client, and advising means you recommend your client to make an investment decision.

However, under Schedule 5 of SFO, dealing also means you "induce or attempt to induce" the client to enter into the agreement. That means, dealing covers the conduct of solicitation (selling).

Should all salespersons of securities be licensed for Type 1? Lawyers may say yes by their legal interpretation. But the fact is that there are many financial planning firms licensed only for Type 4 but selling unit trusts.

It seems that SFC has a different criterion to differentiate dealing and advising. My understanding is that if a financial planning firm does not receive client money when selling unit trusts (i.e. only pass the client's payment cheque to the fund house rather than depositing the client money into its account), then Type 1 licence is not required. It can earn the commission rebate for selling unit trusts by holding only a Type 4 licence.

Such distinction makes sense because the operational risk of keeping client money is much higher and Type 1 is subject to a more stringent FRR requirements. In contrast, banks must be licensed for Type 1 when selling unit trusts because they would receive client money by debiting their bank accounts.

(Disclaimer: The above view does not constitute any legal opinion. Please seek your legal advice in case of doubt.)

[Remark in 2008: Subsequently I've found that the above view for differentiating Type 1 and Type 4 is not taken by SFC. SFC now considers that even IFA firms should be licensed for Type 1 because they are actually distributing unit trusts in return for commission rebates from fund houses (rather than advisory fees from clients).]