Sales Practices and Ethics
Sales Practices and Ethics
This domain tests client-facing conduct: onboarding, suitability, disclosure, order handling, conflicts of interest and fair dealing.
Core rules
- Before dealing, obtain KYC, a unique client code, a signed client agreement and the prescribed risk disclosure. Derivatives are leveraged and not suitable for every investor; the dealer must assess experience, financial capacity and risk appetite.
- Explain the product, not just the return: margin calls, daily MTM, expiry, assignment, physical-settlement obligations and the unlimited loss potential of naked option writing. No assured-return claims.
- Disclose brokerage, exchange charges, STT, stamp duty, GST and other costs. Issue contract notes and order confirmations within prescribed timelines; keep order and trade records.
- Client funds and securities must be segregated. Do not commingle, misuse collateral or front-run client orders. Churning, unauthorised trades and misleading recommendations breach conduct rules.
- Manage conflicts: proprietary positions, market-making and advisory roles can conflict; disclose and prioritise client interest.
Worked example
A client wants to write naked calls because “premium is free income.” The dealer should explain that the writer receives premium but faces unlimited upside loss and margin calls, and that assignment may require delivery. If the client is unsuitable, the dealer should decline or escalate; if suitable, document the risk disclosure and execute only after margin is collected. The dealer should not promise that the option will expire worthless.
Traps
- Presenting option premium as guaranteed income.
- Skipping suitability because the client insists.
- Failing to disclose costs or conflicts.
- Using client funds for proprietary margin.
- Front-running or churning client accounts.