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Hong Kong’s new ‘Streamlined Approach’ potentially makes life easier for professional investors and licensed corporations alike. It simplifies procedures and allows firms to tailor their services to these investors’ specific needs. With the approach already in place, it’s important to review its relevance to your client base as soon as possible. Where applicable, you will need to adjust how you categorise investment products, develop accurate Product Category Information Statements, and set appropriate Streamlining Thresholds.
The new Streamlined Approach was introduced by SFC and HKMA on 28 July. It allows Licensed Corporations to apply a proportionate and risk-based process for dealing with individual professional investors who possess higher levels of net worth and knowledge or experience, also defined as the Sophisticated Professional Investors or SPIs. This approach aims to facilitate compliance with suitability obligations while tailoring services to meet the needs of the SPIs.
Qualifying criteria for SPIs
To be considered an SPI, an individual investor should meet specific criteria related to their financial situation, knowledge or experience, and investment objectives. For instance, an SPI should have a portfolio of at least HK$40 million or its equivalent in any other currency, or net assets (excluding primary residence) of at least HK$80 million or its equivalent in any other currency. Licensed corporations should also assess the SPI’s knowledge or experience, such as holding relevant academic qualifications or having professional experience in the financial sector. However, conservative clients with investment objectives centred on capital preservation and seeking regular income should not be considered as SPIs.
Categorizing Investment Products
Licensed corporations can devise product categories to categorise investment products based on their terms, features, characteristics, nature, and extent of risks. The product categories allow licensed corporations to offer investment products tailored to SPIs’ risk tolerance levels and investment objectives. By providing clear and concise Product Category Information Statements, licensed corporations can equip SPIs with essential information about the investment products within each category.
Flexibility for SPIs
The streamlined approach provides SPIs with a level of flexibility when investing. SPIs can specify their desired Streamlining Threshold, which sets a maximum threshold for investment in a portfolio of investment products with various risk-return profiles. This empowers SPIs to align their investment strategies with their personal circumstances, financial goals, and risk tolerance. Additionally, SPIs can modify their streamlining threshold and product categories at any time, ensuring adaptability to changing market conditions.
Streamlined Approach
The streamlined approach allows licensed corporations to streamline compliance with suitability obligations for SPIs where transactions fall within the Product Categories and the Streamlining Threshold specified by the SPIs. For transactions with recommendation or solicitation, intermediaries are not required to match SPI’s risk tolerance, assess knowledge or experience, or provide product explanations unless requested. In addition, for transactions in complex products without recommendation or solicitation, intermediaries are not required to perform product due diligence and can provide summaries of key terms and features or relevant information upon request instead. Warning statements for complex product distribution can be provided annually instead of for each transaction.
How we can help
We offer licensed corporations expert guidance on adopting the Streamlined Approach for dealing with sophisticated professional investors. Our support ranges from drafting or reviewing your new suitability procedures, checking that you have the appropriate internal controls in place, to providing advice or practical solutions to meet the new regulatory requirements
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