Member Article

In 2006, the SFC plans to conduct another investigation into licensed investment advisers. This follows a report issued in February 2005, in which the SFC noted industry practices that posed “serious regulatory concerns”. It is timely, then, for investment advisers to review their adherence to the standards of conduct expected of them by the SFC. We set out below some of the practices that investment advisers should adopt to ensure regulatory compliance. Investment advisers should: • disclose conflicts of interest. The SFC is still considering whether to require investment advisers to disclose to clients the commission and rebates received from product providers. • make recommendations that are reasonably suitable given their clients’ specific circumstances. • know each client’s financial situation, investment experience, investment objectives and risk tolerance. It is advisable to have a record of such details as the client’s age, family circumstances (such as whether they have any dependents), employment and current assets and liabilities (including sector diversification) and to update this information regularly. • understand the nature and quality of investment products and the experience and reputation of product providers. • explain the basis of recommendations to their clients to help them make informed decisions. • prepare written financial plans including: a summary of the features of the recommended product, an explanation of the consequences of withdrawing the money before maturity, an explanation of the risks of the product and how these are consistent with the client’s risk profile, why the product is recommended and what other investments were considered and why they are not suitable. • enter into a client agreement with each client, setting out the terms, obligations and scope of the services. The agreement should not include unreasonable waivers and disclaimers. An investment adviser cannot avoid the requirement to give reasonably suitable recommendations merely by requiring the client to declare that he or she has not relied on the investment adviser’s advice. • implement systems to allow senior management to monitor and control the selling activities of sales staff. • note that it is an offence to offer unauthorised financial products to the public, subject to certain exemptions. A mere declaration by the client that he or she asked to invest in a product, or that he or she is a professional investor, will not be determinative of whether a product was offered to the public.