Hong Kong: New Requirements To Hong Kong Professional Investor Regime To Become Effective On 25 March 2016


The Hong Kong Securities and Futures Commission (the "SFC") issued a consultation paper titled "Consultation Paper on the Proposed Amendments to the Professional Investor Regime and the Client Agreement Requirements" on 15 May 2013 (the "First Consultation").

On 25 September 2014, the SFC released its conclusions to the First Consultation, detailing a number of significant amendments to the Code of Conduct for Persons Licensed By or Registered with the Securities and Futures Commission (the "Code") with respect to the treatment of certain categories of professional investors, and issued a "Further Consultation on the Client Agreement Requirements" ("Further Consultation"). Amendments outlined in the conclusions to the First Consultation will become effective on 25 March 2016.

On 8 December 2015, the SFC released its conclusions to the Further Consultation ("Second Conclusions") (available in full here) and decided to proceed with the proposal to require the incorporation of certain provisions into all client agreements. Amendments to the Code set out in Appendix A of the Second Conclusions will become effective 18 months from the date of the Further Consultation, being 8 June 2017.

Amendments to Professional Investor Regime

Certain key amendments to the Code provided under the First Consultation will come into effect on 25 March 2016, providing the following:

  • the introduction of a requirement that all category B professional investors 1 who are individuals be treated as non-professional investors for the purposes of the Code; and
  • that category B professional investors that are corporations may continue to be treated as professional investors for the purposes of the Code where they satisfy a principles-based assessment of knowledge and investment experience and have given their consent to be treated as professional investors.

Currently category B professional investors that meet the requirements of a sophistication test and sign an opt-out statement confirming their status as a professional investor may be treated as professional investors for the purposes of the Code, which allows certain requirements of the Code to be dispensed with by intermediaries, for example, the obligations on the intermediaries to:

  • conduct a suitability test
  • establish a client's financial situation, investment experience and investment objectives
  • assess a client's knowledge of derivatives and characterise the client based on his knowledge of derivatives
  • disclose certain transaction-related information
  • enter into a written agreement with the client and provide relevant risk disclosure statements
  • for discretionary accounts, obtain from the client an authorization in written form prior to effecting transactions for the client without his specific authority, the need to explain the authority and the need to confirm it on an annual basis.

Individual Professional Investors

From 25 March 2016, a sophistication test may no longer be carried out in respect of high-net-worth individuals, regardless of their level of knowledge and experience in financial matters and investing, and such high-net-worth individuals may not confirm their willingness to be treated as professional investors. Intermediaries will be required to comply with all Code requirements without any of the exemptions listed under paragraph (a) to (f) above when dealing with category B professional investors who are individuals.

In respect of other existing Code exemptions, such as the requirements to:

  • (i) inform the client about itself (e.g., information about its business, including contact details, services available to clients) and the identity and status of its employees and others acting on its behalf
  • (ii) confirm promptly with the client the essential features of a transaction after effecting a transaction for a client; and
  • (iii) provide the client with documentation on the Nasdaq-Amex Pilot Program,

the SFC takes the view that these exemptions should continue to be available to intermediaries when serving individual professional investors, provided that intermediaries explain the risks and consequences of these Code exemptions and obtain written client consent.

Corporate Professional Investors

A sophistication test will remain applicable for corporate professional investors, but the current, rather prescriptive, sophistication test, which, briefly, requires an assessment of the investor's experience in the type of product, frequency of trading by the relevant investor, dealing experience, knowledge and expertise in relevant products, and awareness of risks in trading in relevant products or markets, will be replaced by a principles-based test. The SFC acknowledged in the conclusions to the First Consultation that these bright-line tests were not rigidly applied in practice, and, as a result, a principles-based test would be more appropriate.

The new principles-based test, as applied to corporate category B professional investors, including investment vehicles that are wholly owned by individual professional investors and family trusts, will involve the corporate category B professional investor meeting the following criteria, which are as follows: (i) appropriate corporate structure and investment process and controls, (ii) the person(s) responsible for making investment decisions having sufficient investment background and (iii) awareness of the risks involved. The corporate category B professional investor will also need to consent in writing to the relevant provisions of the Code (set out at (a) to (f) above) being waived in respect of it. This confirmation exercise must be carried out annually.

Client on-boarding processes will be required to be reviewed and updated by all intermediaries so as to ensure compliance with the changes to the Code by 25 March 2016.

Amendments to Client Agreement Requirements

Paragraph 5.2 of the Code provides that intermediaries, when making a recommendation or solicitation, must ensure that the suitability of the recommendation or solicitation for the client is reasonable in all circumstances. In the amendments provided by the SFC under the Second Conclusions, the below clause will be required to be incorporated into client agreements as a contractual term:

"If we [the intermediary] solicit the sale of or recommend any financial product 2 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 "New Clause")

The SFC considers that it is of paramount importance that the "non-derogation" component of the New Clause is retained to ensure that a client agreement does not contain any disclaimers or terms that would be inconsistent with the New Clause or override other provisions of the Code.

Client agreements will be required to be reviewed and updated to ensure that they are amended to include the New Clause provided by the SFC, since the SFC expects that intermediaries should have revised client agreements re-executed by existing clients or executed in respect of new clients well before the 18-month transitional period for all but a small minority of existing clients.

Investment funds with high net worth individuals as investors will need to have a client agreement with their high net worth investors.

While certain respondents to the Further Consultation queried whether the New Clause requirement will apply to fund managers who do not have any direct contractual relationship with the underlying fund investors, the SFC has confirmed in the Second Conclusions that all intermediaries, including such fund managers, should include the New Clause in their client agreements and that fund managers will be required to have a written client agreement containing the New Clause save, where they deal solely with "Institutional Professional Investors" or "Corporate Professional Investors" as defined in the Code (assuming that such Corporate Professional Investors meet the criteria outlined above).

Intermediaries should note that the existing paragraph 6.4 of the Code, which provides that "A client agreement should properly reflect the services to be provided. Where the services to be provided are limited in nature, the Client Agreement may be limited accordingly...," will remain applicable.

What Should Asset Managers in Hong Kong Do Now?

To the extent that fund managers have not already done so to date and to the extent that such managers offer their funds to high-net-worth individuals, such managers should ensure that they have appropriate procedures in place to comply with the revisions to the Code pursuant to the First Consultation with effect from 25 March 2016, including to comply with the suitability requirements; the need to establish a client's financial situation, investment experience and investment objectives; and the requirement for a written client agreement. Managers who have previously had such clients sign opt-out letters will no longer be permitted to do so with respect to high-net-worth individuals.

Fund managers who offer funds to corporate category B professional investors should ensure that they are in a position to carry out the principles-based test and the written confirmation exercise as outlined above.

Fund managers who are involved in soliciting the sale of, or recommending, investment funds to high-net-worth individuals must put in place written client agreements with such investors containing the New Clause. There will be a grandfathering period for repapering existing client arrangements, but the SFC has made it clear that it requires this process to be commenced as soon as possible.


1 "Professional investors" as that term is defined in the Securities and Futures (Professional Investor) Rules (Cap.571D).

2 "Financial product" will be defined under the revised Code as any "securities, futures contracts or leveraged foreign exchange contracts as defined under the Securities and Futures Ordinance," and the reference to "leveraged foreign exchange" will only be applicable to those traded by persons licensed for Type 3 regulated activity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions