Hong Kong's Securities and Futures Commission has decided, after 2½ years of consulting interested parties, to press ahead with its plan to require the incorporation of a new clause into agreements between independent financial advisors and their clients. This will make 'suitability' a highly actionable phenomenon for the first time.

When the policy comes into effect, clients will be able to brandish the new clause when claiming damages for unsuitable advice. This is seen by many as a body-blow to the Hong Kong IFA sector, which has already ceased to grow under the weight of regulation.

The new clause, in all 'client agreements', must state: "If we [the intermediary] solicit the sale of or recommend any financial product to you [the client], the financial product must be reasonably suitable for you having regard to your financial situation, investment experience and investment objectives. No other provision of this agreement or any other document we may ask you to sign and no statement we may ask you to make derogates from this clause."

The SFC already requires its charges to see to it that the suitability of a recommendation or solicitation for a client is reasonable in all circumstances. This 'suitability requirement' is not, however, to be referred to in the new clause as the SFC wants it to be authoritative in its own right. The regulator is undertaking a study of the 'suitability requirement' with regards to paragraph 5.2 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commissions, from which it springs, but progress appears to be slow.

At some stage the SFC proposes to add a further note under paragraph 6.2(i) of the code to explain that in this context “financial product” refers to any “securities, futures contracts or leveraged foreign exchange contracts as defined under the  Securities and Futures Ordinance (Cap 571).

In the event that a court interprets the suitability obligation in the new clause, the SFC has promised to take the precedent into account when applying the 'suitability requirement' found in its own code of conduct, of which it is inordinately proud.

The new clause will come into effect sometime in the summer of next year. The SFC, however, is already badgering IFA firms to upgrade their 'client agreements' now.