Pre-Investment Cooling-off Period

Last week HKMA eventually announced the implementation of pre-investment cooling-off period (PICOP) in the sales of non-listed derivative products to retail investors since 1 January 2011.

Under the PICOP arrangements, after a bank has ensured that a non-listed derivative product is suitable for an eligible customer and adequately disclosed material product information to the customer, it should allow the customer at least 2 calendar days (of which the last day should be a business day) to understand the product, consider the appropriateness of the investment and consult with family members and friends. The price and terms of transaction will be fixed on the day when the customer gives instruction to the bank to confirm placement of an order (i.e. upon the end of the PICOP). The bank must arrange the customer to give specific confirmation of order placement on the execution day, supported by proper audit trail. Under no circumstances should the bank allow the customer to confirm the order before the execution day.  Taking T as the sales day, execution day should be a business day on T+2 at the earliest.

It appears that if the customer keeps silent (i.e. no confirmation of the order) upon the end of the PICOP, the order would not be placed.

In determining whether PICOP should be applied to a particular dealing with a retail customer, the bank should consider the customer's age, asset concentrationand whether he/she is a first-time buyer of the same type of product as follows:

• For an elderly customer (aged 65 or above), PICOP should be mandatory except that the customer will be allowed to opt out from the PICOP arrangement if (i) the customer's asset concentration is below 20% and (ii) he/she is not a first-time buyer of the type of product in question.
• For a non-elderly customer, PICOP is not necessary except if (i) the customer's asset concentration is 20% or above and (ii) he/she is a first-time buyer of the type of product in question.

Asset concentration is the percentage of the customer's total net worth (excluding real estate properties) to be invested in the relevant transaction. The bank may rely on the customer's self-declaration to ascertain asset concentration.

Even one particular transaction does not exceed 20%, how about if the customer's total portfolio has been occupied by more than 20% by non-listed derivative products (including his/her previous transactions)?

In determining whether a customer is a "first-time buyer" of a particular type of product, a bank may take into account his/her actual investment(s) executed through the bank or another intermediary. If the customer has such investment experience with another intermediary, the bank should gather from the customer the relevant documentary proof (e.g. contract notes or monthly statements) and retain a copy for record purpose. Moreover, the bank should obtain the customer's signed declaration that he/she has such investment experience.