Business Conduct, Ethics and Client Suitability Obligations
This domain tests the SFC Code of Conduct in practice: onboarding, suitability, conflicts, order handling, client assets and personal ethics.
Core obligations
Paragraph 4 (know your client) and paragraph 5 (suitability) are the backbone. A licensed or registered person must assess a client's financial situation, investment experience, investment objectives, risk tolerance and investment horizon, and must assess derivative knowledge where derivatives are recommended. Client agreements must be in writing and risk disclosure statements signed before trading. Paragraph 15 governs professional investors: a PI must receive a written statement that the firm is exempt from certain Code requirements. Individual PI status requires a portfolio of at least HK$8 million; corporate PIs need total assets of HK$40 million or a portfolio of HK$8 million.
Conflicts and inducements
Client interests come first. Inducements must be disclosed, and rebates or soft dollars quantified and consented to. Personal account dealing requires pre-clearance, and staff must not front-run client orders. Gifts and entertainment above the firm's policy threshold must be recorded.
Order handling and client assets
Client orders take priority over firm orders, and allocation policies must be written and applied consistently. Client money must be held in a segregated trust account with an approved bank and client securities kept in safe custody under the Client Money Rules and Client Securities Rules. Records must be kept for at least seven years.
Worked example
A relationship manager recommends a leveraged FX-linked note to a 70-year-old retiree after a two-minute call. The note is a complex product with 20 times leverage. Issues: no documented risk tolerance assessment, no derivative knowledge assessment, a maximum loss that may exceed the client's stated capital preservation objective, and concentration risk. The recommendation is likely unsuitable, and a signed risk disclosure statement does not cure that. The firm should also check whether the client qualified as a PI and whether the solicitation complied with the complex product rules.
Traps
- Thinking a signed risk disclosure statement waives suitability.
- Treating an execution-only instruction as removing all duties.
- Assuming PI status removes the duties of honesty and fair dealing.
- Overlooking segregation and seven-year record-retention requirements.
- Ignoring concentration risk when a single product dominates the portfolio.