Regulatory, Compliance and Commercial Hong Kong Client Alert Client Agreement Requirements and Contractual Provision on Suitability Now Become a Reality – How to Get Yourself Prepared? On 8 December 2015, the Securities and Futures Commission (SFC) issued its Consultation Conclusions on the Client Agreement Requirements (2015 Consultation Conclusions). The SFC announced its decision to proceed with the proposal to require intermediaries to include in client agreements a contractual provision on suitability (New Clause), as part of the minimum content requirements under the new paragraph 6.2(i) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). The changes will affect client agreements with both existing and new clients. This proposal has long been under discussion since 2013. Public consultation on proposals on client agreements initially started in 2013 (2013 Consultation1 ). In 2014, the SFC concluded on some of these proposals (including no inclusion of provisions which are inconsistent with the intermediary’s obligations under the Code of Conduct or which misdescribe the actual services provided to clients); and further consulted the public on the New Clause having regard to the strong market feedback on the proposal to incorporate the suitability requirement in client agreements (2014 Consultation Conclusions and Further Consultation2 ). The 2015 Consultation Conclusions were issued as a result of the further consultation on the New Clause in 2014. Under the new paragraph 6.2(i) of the Code of Conduct, the New Clause to be incorporated in client agreements is as follows: “If we [the intermediary] solicit the sale of or recommend any financial product 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.” 1 Consultation Paper on the Proposed Amendments to the Professional Investor Regime and the Client Agreement Requirements (May 2013) 2 Consultation Conclusions on the Proposed Amendments to the Professional Investor Regime and Further Consultation on the Client Agreement Requirements (September 2014) December 2015 Beijing Suite 3401, China World Office 2 China World Trade Centre 1 Jianguomenwai Dajie Beijing 100004, PRC Tel: +86 10 6535 3800 Fax: +86 10 6505 2309 Hong Kong 14th Floor, Hutchison House 10 Harcourt Road Central, Hong Kong Tel: +852 2846 1888 Fax: +852 2845 0476 Shanghai Unit 1601, Jin Mao Tower 88 Century Avenue, Pudong Shanghai 200121, PRC Tel: +86 21 6105 8558 Fax: +86 21 5047 0020 2 Baker & McKenzie | December 2015 There is a note (see below) in the new paragraph 6.2(i) of the Code of Conduct which explains the term “financial product” in the context of the New Clause. In this regard, the SFC mentions that intermediaries may either insert this as a footnote to the New Clause or reflect this in the definition section of their agreements. “Note: “Financial product” means any securities, futures contracts or leveraged foreign exchange contracts as defined under the SFO. Regarding “leveraged foreign exchange contracts”, it is only applicable to those traded by persons licensed for Type 3 regulated activity.” In summary, as a result of the 2015 Consultation Conclusions (in respect of the New Clause) and the 2014 Consultation Conclusions and Further Consultation (in respect of the other proposals), the following changes to the Code of Conduct relating to client agreements shall become effective on 9 June 2017: 1. (under the new paragraph 6.2(i) of the Code of Conduct) incorporation of the New Clause in client agreements; 2. (under the new paragraph 6.5 of the Code of Conduct) no inclusion of any clauses, provisions or terms in client agreements which are inconsistent with the intermediary’s obligations under the Code of Conduct; 3. (under the new paragraph 6.5 of the Code of Conduct) no inclusion of any clauses, provisions or terms in client agreements by which a client purports to acknowledge that no reliance is placed on any recommendation made or advice given by the intermediary; and 4. (under the new paragraph 6.5 of the Code of Conduct) no inclusion of any clauses, provisions, terms or statements in client agreements which misdescribe the actual services to be provided to clients. The SFC has emphasized that intermediaries should commence the client agreement review process immediately and expects that the exercise will be completed well before 9 June 2017. For existing clients, intermediaries should ensure that their existing client agreements are revised to incorporate the changes. Since these changes could have implications on the contractual relationship vis-à-vis an intermediary and its clients, it is important for the intermediary to understand and assess thoroughly its potential legal exposure as a result and consider how to get itself prepared for the changes. In particular, you, as an intermediary, should consider, amongst others: 1. As for the relationship between you and your clients: • Consider what types of services and products you are offering to your clients. • Consider whether your services involve any “solicitation”, “recommendation” or “advice” of any financial products. December 2015 | Baker & McKenzie 3 2. As for your client agreement: • Make sure you retrieve all documentation that forms your client agreement. The documentation may include documents signed by the client at your request when the client engages your services, as well as any ad-hoc agreements for investment in specific financial products. • In cross-border service arrangements where clients are served by multiple branches, consider how the documentation is currently structured and whether amendments are required. • Check how your services are described in your client agreement. Are these descriptions accurate and clear? If not, consider what amendments are required. • Check for any non-reliance and exclusion of liability provisions in your client agreement, and consider what amendments are required. • Remove any provisions which are inconsistent with your obligations under the Code of Conduct. • Incorporate the New Clause and amend your client agreement as necessary. • Consider how to effect these changes for new and existing clients. 3. Communicate and implement these changes throughout your firm. Staff should act consistently with your client agreement (for example, if your client agreement describes the services as nonadvisory, the staff shall not provide investment advice). Consider the need for staff training and additional internal procedures. Although the changes relate to the client agreement requirements, the implications are clearly more. It is not merely an agreement review exercise. Management and staff should be aware of the legal and practical implications on their day-to-day conduct of the business. Invitation We welcome the opportunity to discuss the implications of the above (e.g., what changes may be required to your client agreements); please contact Karen Man (+852 2846 1004) or Grace Fung (+852 2846 2459) www.bakermckenzie.com Should you wish to obtain further information or want to discuss any issues raised in this alert with us, please contact: Karen Man +852 2846 1004 firstname.lastname@example.org Grace Fung +852 2846 2459 email@example.com This publication has been prepared for clients and professional associates of Baker & McKenzie. Whilst every effort has been made to ensure accuracy, this publication is not an exhaustive analysis of the area of law discussed. Baker & McKenzie cannot accept responsibility for any loss incurred by any person acting or refraining from action as a result of the material in this publication. If you require any advice concerning individual problems or other expert assistance, we recommend that you consult a competent professional adviser. 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