Firms soliciting wealthy individuals in Hong Kong may soon be hit with an extra layer of compliance if the city’s markets regulator ends the practice of treating them as them as professional investors.
This would have a significant effect on the likes of hedge fund managers and private banks, which in many cases treat high-net-worth individuals (HNWIs) as sophisticated investors for the purposes of Hong Kong's Code of Conduct for Licensed Persons.
The Securities and Futures Commission (SFC) has proposed that HNWIs and investment vehicles they own, such as family trusts, be classed as retail investors, for the purpose of ensuring suitability of products. (The consultation ends tomorrow (August 11).)
The regulator argues that HNWIs who meet the HK$8 million (around $1 million) net-worth criteria for being labelled professional investors may not necessarily understand investment products and their associated risks.
“You can have a lot of money, but you might not be sophisticated when it comes to making investments,” says Anne-Marie Godfrey, a Hong Kong-based partner at law firm Bingham.
If the proposals go through, hedge fund managers will have to assess the suitability of their fund for HNWIs and establish the individual’s investment experience and objectives before admitting him or her to the strategy.
“It will, in some cases, up the amount of due diligence that hedge fund managers have to do,” says Godfrey. “They will still be able to admit them [HNWIs], but it will be a more onerous process.”
Meanwhile, intermediaries are now responsible for assessing whether a HNWI should be treated as a professional investor based on criteria such as whether he has made at least 40 transactions a year and whether he has traded for the past two years in the market he intends to invest in.
But these criteria are not being rigidly applied by intermediaries and the current guidelines laid down in the Code are somewhat unsuitable and difficult to apply, says Godfrey.
There will also be a requirement for a client agreement with all HNWIs, and it is proposed that the suitability requirements set out in the Code would be built into the client agreement.
“Intermediaries will be understandably reluctant to deal with every HNWI as though they are a retail investor, regardless of their level of sophistication,” says Godfrey.
Corporations including family offices and companies investing through their treasury functions may still be treated as professional investors. They would be subject to a principles-based analysis, with the intermediary required to assess the investor’s corporate structure and investment process and determine whether they should be treated as a professional investor.
Among the suggestions in the consultation is that the current net-worth threshold for determining whether an investor is an HNWI might be raised beyond HK$8 million.