Streamlined Approach for Handling Transactions for SPIs

On 28th July 2023, the Hong Kong Monetary Authority (“HKMA“) and the Securities and Futures Commission (“SFC“) issued a joint circular in response to queries and feedback received by both regulatory authorities in relation to the handling of suitability obligations applicable to a category of investors known as Sophisticated Professional Investors (“SPI”). A SPI has been defined as an individual who meets specific requirements relating to their financial situation, knowledge or experience, and investment objectives.

Building on previously issued FAQs addressing suitability assessments and product information disclosure, this circular serves as a valuable continuation, providing licensed corporations (or “intermediaries”) with additional guidance on adopting a “Streamlined Approach” for dealing with SPIs.

Under the Streamlined Approach, licensed corporations can apply the framework if they ascertain that a client possesses the sophistication and risk tolerance typical of an SPI. In effect, where the SPI meets the criteria, intermediaries could apply customised procedures when providing services to these clients. For instance, the Streamlined Approach includes the foregoing of certain suitability obligations when dealing with the SPI.

PDF version: Streamlined Approach for Handling Transactions for Sophisticated Professional Investors

Qualifying Criteria

To qualify as an SPI, the individual must meet at least one condition from each of the 3 criteria below:

Financial Situation

Possess a portfolio of at least HK$40 million or its equivalent in any currency;
Have net assets, excluding their primary residence, of at least HK$80 million or its equivalent.

Knowledge or Experience

Hold a degree or post-graduate diploma in designated disciplines;
Possess a professional finance qualification (CFA, CIIA, etc);
Have at least 1-year relevant work experience in a financial sector in a regulated position in Hong Kong or elsewhere;
Have executed at least 5 transactions within the past 3 years in the same product category.

Investment Objective

Investment objective should not be conservative, indicating a pursuit of growth or higher returns rather than just capital preservation and regular income.

Eligible Investment Transactions

Eligible investment transactions are transactions that meet defined criteria set by the SPI, which allow intermediaries to forgo certain suitability requirements when carrying out transactions for SPIs.

It should be noted that in the context of this publication, a ‘transaction‘ refers to the solicitation, execution, and/or provision of investment recommendations.

The 2 criteria to determine eligible investment transactions are:

1. Product Category

The Streamlined Approach requires the SPI to specify a maximum threshold (which could be an absolute amount or percentage (%) relative to SPI’s assets under management / advice, known as the Streamlining Threshold, for execution purposes. Intermediaries must maintain proper documentation of this threshold, including the rationale behind its determination.

To ensure compliance with the streamlining threshold, intermediaries must implement effective systems and controls. This can be achieved by either:

Ensuring that total exposure resulting from investment transactions under the streamlined approach should not exceed the streamlining threshold at the time of execution;
Creating special accounts to consolidate eligible transactions and ensuring that total exposure from all positions held remain below the threshold. The percentage allocated to this threshold should be periodically reviewed or discussed with the SPI.

2. Streamlining Threshold

To ensure compliance with the streamlining threshold, intermediaries must implement effective systems and controls. This can be achieved by either:

Ensuring that total exposure resulting from investment transactions under the streamlined approach should not exceed the streamlining threshold at the time of execution;
Creating special accounts to consolidate eligible transactions and ensuring that total exposure from all positions held remain below the threshold. The percentage allocated to this threshold should be periodically reviewed or discussed with the SPI.

Intermediaries should implement measures to detect transactions that exceed the predefined streamlining thresholds. Where a transaction reaches or surpasses these thresholds, the intermediary should issue warning statements to the SPI, notifying them that the limit cap has been reached.

Additionally, Intermediaries should conduct an annual review of compliance with the streamlining threshold. Where the gross exposure from investment transactions executed under the Streamlined Approach exceeds the streamlining threshold, intermediaries are required to promptly alert the SPI.

Streamlined Approach

A. When executing transactions where a recommendation or solicitation has been given under the Streamlined Approach:

Intermediaries are not obliged to align SPI’s risk tolerance, investment objectives, and investment horizon with eligible investment transactions (i.e., investment products within the streamlined threshold).
Additionally, there is no requirement for Intermediaries to assess SPI’s knowledge, experience, or concentration risk for these transactions.
Providing product explanations is optional, except upon specific requests from SPI or when material queries are raised. However, Intermediaries should furnish up-to-date product offering documents using electronic means, such as hyperlinks or email attachments.
Additionally, there is no mandatory obligation for Intermediaries to document the rationale behind investment recommendations given to the SPI, if the recommendations are on eligible investment transactions.

B. For complex product transactions where a recommendation or solicitation has not been given under the Streamlined Approach:

Intermediaries are exempt from product due diligence for specified Product Categories. However, for bonds without offering documents, intermediaries must provide summaries or reliable information.
Intermediaries are not required to match the SPI’s risk tolerance or investment objectives. Additionally, they are not obligated to assess SPI’s knowledge or concentration risk.
When dealing with SPIs intermediaries may elect to provide product explanations, but it is not mandatory unless an explanation is specifically requested, or notifications of material changes are raised by the SPIs. If applicable, intermediaries should also make electronic offering documents available to the SPI.
For the distribution of complex products, intermediaries can issue warning statements annually rather than requiring them for every transaction. transactions.

Application of the Streamlined Approach

The Intermediary may only utilize the Streamlined Approach if they are content that the SPI fulfils the qualifying criteria concerning their financial situation, knowledge or experience, and investment objectives.

The Intermediary must keep written documentation of this assessment, along with records of relevant information and documents obtained to demonstrate the basis of the assessment. Additionally, the Intermediary should maintain records of communication with the SPI to justify the choice of product categories within the Streamlined Threshold set by the SPI.

Before implementing the Streamlined Approach for Eligible Investment Transactions with an SPI, intermediaries must:

Establish written agreements with each SPI detailing their consent and the consequences of being treated as an SPI. This agreement should also include details relating to the streamlined approach, product categories and streamlining threshold.
Clearly define in writing the assessment criteria used to qualify the client as an SPI.
Communicate in writing the Product Categories and Streamlining Threshold applicable to investment transactions under the Streamlined Approach.
Provide a comprehensive explanation to the SPI regarding the implications of being treated as an SPI and their right to withdraw from this status at any time.

Intermediaries should conduct an annual review to ensure that the SPI continues to meet the qualifying criteria and still consents to allow the intermediary to execute investment transactions falling within the specified Product Categories and Streamlining Threshold under the Streamlined Approach.

During this annual review, intermediaries should remind the client in writing of:

The consequences of being treated as an SPI.
The specific Product Categories designated by the SPI, along with information from the Product Category Information Statements.
The Streamlining Threshold defined by the SPI and a notification to the SPI if any breach occurred.
The SPI’s right to withdraw from the SPI status, include or exclude a Product Category, and modify the Streamlining Threshold at any time.

– The comments raised within this article do not form a legal opinion nor should they be construed as being legal advice –

Streamlined Approach when Handling Transactions for SPIs