PI is classified into two categories. Category-A PI includes those "institutional investors" such as banks, brokers, government bodies, etc. They are identified as PI by their status. Category-B PI includes trustees, individuals, corporations, etc. They are defined as PI by means of their financial position. Typically most of an intermediary's PI customers are of Category-B.
What are regulatory exemptions available for PI? I prefer classifying them into two types:
- Offering exemptions - e.g. offer of unauthorized products (SFO S103), no restrictions of cold calling (S174) and offer of securities without written document (S175)
- Operational exemptions - e.g. no need to send contract notes & account statements, no client agreement, no suitability assessment, etc.
Offering exemptions are equally applied to both categories of PI. Intermediaries like to use these exemptions as they can generate more sales opportunities. For operational exemptions, there are different treatements between two categories. Relatively speaking, Category-B is more protected than Category-A PI, e.g. written consent is required if operational exemptions are applied to Category-B PI.
There are often people asking me whether an "investment experience assessment" (e.g. 40 transactions per year) has to be done before treating a customer as a PI. My answers: first, such assessment is only required if you want to apply the operational exemptions in Conduct of Conduct to Category-B; second, such an assessment is only done once (i.e. no need for annual review).
Is exemptions for PI really a blessing to investment business? I would say yes or no. While offering exemptions are really beneficial, operational exemptions are often setting a trap for business people! I'll continue in tomorrow's blog.
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