SFC FAQs on Suitability Obligations

On the back of the SFC’s guidance by way of responses to FAQs regarding the application of the new “suitability clause” in client agreements between financial intermediaries and their clients (Industry Insights, December 2016), comes another set of responses to FAQs; this time, further guidance on the “suitability obligations” for licensed or registered persons pursuant to para. 5.2 of the SFC’s Code of Conduct.

The “suitability clause” (or term) and the “suitability obligations” are different but related concepts. It is helpful to think of them both as (among other things) the SFC’s two-pronged attempt to ensure the suitability of recommendations given by financial intermediaries to their clients. “Suitability” in this context goes to the heart of the SFC’s approach to investor protection.

The “suitability obligations” denote a well-known regulatory standard to ensure that a recommendation (or solicitation) to a client is reasonable in all the circumstances.

The new “suitability clause” (with its inbuilt non-derogation provision – a new para. 6.2(i) of the Code of Conduct) will come into effect this summer (9 June 2017) and seeks to enhance investor protection by way of contractual provision. Such a clause will help limit the ability of financial intermediaries (and their representatives) to rely on contractual provisions to maintain that they are acting on an “execution-only” basis even though financial advice is provided to an investor client.

The SFC’s most recent guidance came just before “Christmas Eve”, in the form of two sets of detailed responses to FAQs concerning what triggers the suitability obligations (“FAQs on Triggering of Suitability Obligations”) and how financial intermediaries should comply with these obligations (“FAQs on Compliance with Suitability Obligations”).

Both sets of FAQs are required reading for those working for financial intermediaries and their in-house compliance and regulatory teams and for those advising aggrieved investors. As is often the case, it is important to pay attention to the detail; for example, not just the detail in the guidance and the illustrations of the FAQs concerning whether and when the suitability obligations are triggered but also the detailed standards and relevant requirements set out in the Code of Conduct and related guidelines*.

* For example, the “Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the Securities and Futures Commission” (known as the “Internal Control Guidelines”).