Banks in Hong Kong less able to Shrug off Mis-selling Claims in Future, warn Lawyers

Banks in Hong Kong have largely been able to rely on contractual clauses to avoid successful mis-selling claims being made against them, but regulatory changes introduced earlier this year threaten this, lawyers warned. 

A new regime for professional investors and changes to client agreements will increase investor protection in the territory and compel banks to do more to ensure the suitability of financial products offered to investors, they said. 

Under the Securities and Futures Commission's new Professional Investor Regime, introduced in March 2016, and new client agreement requirements that come into effect on 9 June 2017, banks will no longer be able to rely on contractual clauses to avoid legal action over mis-selling claims from investors. Lawyers said this will mean a stricter focus on compliance and training among bank staff and a reduction in investment advice activity. 

"The pretence whereby some banks give advice to clients about investments but seek to rely on their acting on an execution-only basis should become less of an issue in Hong Kong," said Jonathan Cary, partner at law firm RPC in Hong Kong, in a client update. 

"The SFC has mandated that by 9 June 2017, all financial intermediaries governed by its Code of Conduct exclude from their client agreements any provision which is inconsistent with their obligations under the code or mis-describes the actual services to be provided to a client."

Mandatory New Clause

The new client agreement regime will insert a mandatory new clause into all client agreements to compel banks to consider the suitability of any investments recommended to clients. Banks must take into account investors' financial situation, investment experience and investment objectives.

The clause also contains a non-derogation component which means that any contractual exclusions relied upon by banks to defeat the effect of the new clause will have no effect, said Gareth Thomas, partner at Herbert Smith Freehills in Hong Kong. 

In a client briefing, Thomas said the SFC saw this part of the new clause as being of paramount importance, and that it was aimed at ensuring a fair balance in the relationship between intermediaries and their clients.

"Going forward banks should be cautious in relying on contractual carve-outs to protect against investor claims for mis-selling," Thomas said. 

"In cases where the mandatory client agreement clause applies, banks will not be able to rely on contractual carve-outs. Rather, banks should focus on ensuring compliance with the new and existing regulations through training and effective management."

Court Case

Under the new regime, cases such as the recent Court of Appeal decision in favour of DBS Bank v Sit Pan Jit are less likely to arise. In that case, DBS Bank was able to rely on a contractual clause to defend itself against allegations of mis-selling Sit equity-linked notes which collapsed in value during the financial crisis. 

DBS denied the allegations against it and relied on its standard non-reliance clauses in the underlying contracts, which stated that DBS had no duty to give investment advice to the customer and that, even if it did have such a duty, any such advice was provided on an "execution-only" basis and the customer should use his own judgement when making investment decisions.

Donna Wacker, partner at Clifford Chance in Hong Kong, said the decision followed "a steady line of cases in Hong Kong in which banks have been successful in depending upon non-reliance clauses in their client agreements and standard terms of business".

She said, however, that decisions based on non-reliance clauses in Hong Kong might become "somewhat academic" in light of the reforms to the professional investor regime and the new client agreement rules. 

New Regime

In December last year, the SFC said it would give firms in Hong Kong 18 months to insert a clause into all existing and new client agreements. The clause enables investors to claim for damages under the client agreement if the intermediary sells or recommends a financial product which is unsuitable. 

"The changes will result in fairer terms of business for investors, and also prevent intermediaries from mis-describing the actual services provided to the client," Ashley Alder, the SFC's chief executive, said at the time.

Firms have been urged to revise their client agreements in good time before the new regime becomes effective in 2017. 

The new clause reads: "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."

"Disputes going forward may focus on the suitability of the financial product for a particular individual," Wacker said. "Banks will need to demonstrate they have made sufficient efforts to ascertain suitability and that sufficient records are kept in respect of any transactions, including records of any statements made to the client both orally and in writing."


North Asia editor for Thomson Reuters Regulatory Intelligence. He is based in Hong Kong.