Professional Investor Changes in Hong Kong to Benefit Compliance, Say Officials

Recently proposed amendments to Hong Kong's professional investor regime should benefit compliance and legal professionals since they reflect evolving market practice, industry officials said. The Securities and Futures Commission ("SFC") on 1 March issued a public consultation on amendments to the Securities and Futures (Professional Investor) Rules, seeking to allow more investors to qualify as professional investors.

"This can only make the compliance process more aligned with the reality of how investors in Hong Kong hold their assets, particularly those served by private banks. When you have regulatory requirements reflecting the reality and focusing on the risk this reality brings and being practical, it is always welcome and embraced by the market," said Judy Vas, EY's Asia-Pacific regulatory leader for financial services in Hong Kong.

Under the proposals, joint accounts with non-associates and assets held in investment vehicles owned by individuals may be counted in ascertaining whether individuals meet the monetary threshold to qualify as professional investors ("PI"). Additionally, the SFC wants to expand the categories of professional investors to include corporations with investment holding as their principal business and which are wholly owned by one or more professional investors, as well as corporations that fully own other corporations that are qualified professional investors. Alternative forms of evidence would also be allowed to demonstrate qualification as a professional investor.

"The proposed amendments are intended to enhance market transparency and promote consistency in the application of the PI Rules," said Ashley Alder, the SFC's chief executive, when the consultation was launched. "Our key consideration is that the proposals should cater for the business needs of intermediaries and their clients without compromising investor protection."

Compliance Implications

The SFC said it expected more persons to be able to qualify as professional investors under the new proposals but warned intermediaries would still be subject to the suitability requirement and other fundamental requirements when serving them.

The regulator said the proposals were separate from a 2014 consultation exercise which aimed to enhance the professional investor regime and client agreement requirements with amendments to the Code of Conduct.

"The universe of professional investors will be broadened and more alternatives will be available in terms of evidence of PI status. This should make it easier to sell unauthorised investment products generally, and will certainly give those SFC-licensed firms that are only permitted to deal with PIs more options," said Jane McBride, partner at law firm Deacons in Hong Kong. "This is a welcome initiative. It is always better to have more flexibility sooner than later, of course," she said.

The move might simplify the SFC's overly-complicated and burdensome PI regime, said a local head of legal and compliance at an asset manager, speaking on condition of anonymity. "In that sense it is welcome. In another sense, it is still a regime only law firms and regulatory advisers could love," he said.

The rules set a threshold in which compliance is reduced for securities dealings for professional investors, said Mohan Datwani, head of research, training and technical standards at the Hong Kong Institute of Chartered Secretaries.

"It is rational to look at assets owned by the PI through, say, wholly-owned companies. Obviously, from [a] compliance angle, statements and accounts in [one's] own name … [are] easier to verify. As the class of acceptability increases, inevitably it means more work and associated risks," he said.

There would be a need for detailed practices and procedures as to what documents are required for evidence, gauging and listing suitable certifiers, and whether there exist any triggers for seeking further information. This would mean more work for the institutions involved and probably require risk assessments of what constitutes acceptable evidence to determine a customer's professional investor status, Datwani said.

Policy Rationale

Vas said the SFC's approach was prudent, given the state of the market and that the regulator was formalising modifications it had granted in recent years. 

"The new change is positive and the pragmatic approach the SFC has taken I believe is a change to respond to the industry lobby, particularly from the private banks," she said.

If the proposals proceed, three primary changes that might occur to the regulatory regime are as follows:

  • Allowing joint accounts with non-associates (such as siblings, parents or grandparents and business partners) and assets held in investment vehicles owned by individuals to be counted in ascertaining whether individuals meet the monetary threshold to qualify as professional investors;
  • Expanding the categories of professional investors to include corporations which have investment holding as their principal business and are wholly owned by one or more professional investors, as well as corporations which wholly own another corporation that is a qualified professional investor;
  • Allowing public filings, certificates issued by custodians or auditor or certified public accountant as alternative forms of evidence to demonstrate qualification as a professional investor.

"Given this is the direction the industry has been lobbying for, I would expect implementation to be soon, as reflected in the short one-month consultation," Vas said. 

Comments on the consultation paper are due by 3 April 2017.

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Ajay Shamdasani is a senior staff writer with Thomson Reuters Regulatory Intelligence in Hong Kong. He covers regulatory developments in Hong Kong, India and South Korea. He also writes about money laundering, fraud, corruption, data privacy and cybercrime.