Suitability Obligations

Last week SFC published the FAQ on suitability obligations. This may be regarded as a principles-based regulatory approach towards investment advisers (IA). That means, SFC has not intended to expand the existing Code of Conduct requirements but only supplement them with guidance on best practices.

Basically most of the tips given by SFC belong to "old wine in new bottle", but the following points are remarkable:

• SFC states clearly that suitability means "matching" the risk return profile of investment products with personal circumstances of clients.
• In terms of KYC information for suitability purpose, Code of Conduct has only mentioned clients' financial situation, investment experience and investment objectives. SFC has extended this information list to investment knowledge, investment horizon, risk tolerance and capacity to make regular contributions.
• SFC shows understanding that many clients are not willing to disclose their financial situation. In this case, IA is expected to explain to clients the limitations of his advice and the assumptions made by him.
• When conducting product diligence, IA should not rely only on offering documents and marketing materials, but make their own enquiries and obtain full explanations from product issuers.
• Where IA only recommend investment products which are issued by their related companies, they should disclose this limited availability of products to each client.
• IA should document and provide a copy to each client of the rationale underlying investment recommendations made to the client.
• Client files, esp. those with a higher mis-selling risk, should be sample reviewed by qualified and competent personnel (by compliance officer?).

The FAQ guidance has reflected SFC's dissatisfaction with its observations of selling practices over the past years. Needless to say, the enhanced sales compliance practices would make the life of IA less easier.