SFC tries to enhance professional investors' protection

In May, the Securities and Futures Commission launched a consultation on proposals to enhance protection given to individual professional investors and their investment companies or trusts.

If adopted, the proposals would amend the code of conduct for intermediaries that come under the SFC’s supervision – licensed corporations and registered institutions that conduct securities business. The proposals come on the back of the SFC’s own review in October of the selling practices of licensed corporations.

The proposals should also be viewed in the context of the greater protection afforded to “retail” investors. For example, witness the recently announced proposed multimillion-dollar settlement between RBS and several hundred retail investors in connection with alleged misselling claims relating to Lehman equity-linked notes. Professional investors are excluded from that settlement. Other banks have been “persuaded” by the SFC and the Hong Kong Monetary Authority to settle similar claims.

But professional investors who have commenced court proceedings against banks for alleged mis-selling practices have not fared well in Hong Kong. In particular, Banks and intermediaries have been astute in relying on contractual terms and conditions, “disclaimers” and the like, to absolve them of liability.

Who is a professional investor?

In lay jargon, a professional investor is a “high-net-worth individual”. For the purposes of the SFC’s Professional Investor Rules, a professional investor includes (among others) an individual with a portfolio of not less than HK$8 million (or the foreign-currency equivalent) or his or her investment vehicle with a portfolio of not less than HK$8 million or total assets of not less than HK$40 million. What proposals and why? At the heart of the SFC’s proposals is a bid to stop banks and intermediaries who make investment recommendations hiding behind contractual disclaimers (the small print).