Additional protective measures for investors when purchasing complex products
There is a wide variety of investment products available in Hong Kong, ranging from simple products to complex ones. A complex product is an investment product whose terms, features and risks may not be easily or readily understood by a typical retail investor because of its complex structure.
In the traditional offline sales environment, investors are usually introduced to a limited number of investment products by the intermediaries. Complex products generally tend to be sold with intermediaries providing advice. According to SFC regulatory requirements, if a licensed or registered person solicits the sale of or recommends any financial product to a client, the licensed or registered person should ensure that the financial product is suitable for the client in all the circumstances, with consideration of the client’s financial situation, investment experience and investment objectives. In this regard, therefore, investors buying complex products are likely to be protected by the suitability requirement during the offline sales process.
However, with the proliferation of online investment platforms in the market, investors can now access and transact on a broad range of investment products (including complex ones) in a self-directed manner. Typically, investors investing through an online platform would not need to contact any sales staff or investment advisor, and can simply select a product based on the information and materials posted on the platform. As complex products are generally more difficult to understand, some investors may end up buying unsuitable complex products without the benefit of proper guidance and advice as they would in the offline environment from interactive communications with a sales staff or investment advisor.
To enhance investor protection, effective from 6 July 2019, suitability requirements are extended to the sale of complex products (except derivative products traded on an exchange – see Note) in the case where intermediaries receive a request from you, as an investor, or you place an order in a self-directed manner. This applies to both the online and offline sales environments. Intermediaries are required to assess whether you, as an investor, are suited to invest in the complex product. They must also provide you with the major product information (e.g. key terms and features of the complex product) and warning statements about the product, in particular a warning that the product is a complex product and that you should exercise caution in relation to the product.
You should read the relevant product information carefully and pay attention to the warning statements before making any investment decisions.
Examples of complex products that are subject to additional protective measures
- Complex bonds (e.g. perpetual or subordinated bonds, or those with variable or deferred interest payment terms, extendable maturity dates, or those which are convertible or exchangeable or have contingent write down or loss absorption features, or those with multiple credit support providers and structures) and/or bonds comprising one or more special features
- SFC-authorized derivative funds
- SFC-authorized hedge funds
- SFC-authorized unlisted structured investment products (including equity-linked deposits, equity-linked instruments/investments, etc.)
- Other non-exchange-traded structured investment products
- Security tokens
Examples of complex products traded on an exchange that are NOT subject to additional protective measures (see Note)
- Futures contracts traded on the Hong Kong Futures Exchange
- Equity derivatives traded on the Stock Exchange of Hong Kong (e.g. DWs, CBBCs and listed share options)
- Synthetic ETFs and futures-based ETFs authorized by the SFC and traded on the Stock Exchange of Hong Kong
- L&I products authorized by the SFC and traded on the Stock Exchange of Hong Kong
Complex products = high risk?
Complex products vary in complexities and risks. As such, being a complex product does not necessarily mean that it is also of high risk. For example, it is common for bond funds to use derivatives to a substantial extent for different reasons, such as gaining exposure to certain restricted markets for geographical exposure in respect of a global bond fund. On the other hand, many simple (i.e. easy to understand) products, such as high yield non-complex bonds, can also be risky.
The complexity of a product can be due to a number of factors (e.g. the use of derivatives, lack of a liquid secondary market and lack of adequate and transparent information of the product available), hence making it difficult for typical retail investors to understand the product, irrespective of its risk level. Thus, the additional protective measures require intermediaries to ensure that a complex product is indeed suitable for the client when they receive a request from the client or the client places an order in a self-directed manner.
Investors should take investment responsibility even for simple products
Simple products are those that typical retail investors can reasonably be expected to understand their terms, features and risks. You should be aware that simple products are not necessarily less risky; in fact, many such products (e.g. high yield non-complex bonds) can be risky. Intermediaries are not required to perform suitability assessments for simple products when clients make their purchases in a self-directed manner. Investors should not overlook or underestimate the risks of investing in them and should take responsibility for their own investment decisions.
Make informed investment decisions
As a rule of thumb, whether you are considering purchasing simple or complex products in a self-directed manner or upon the solicitation or recommendation of an intermediary, you should always conduct your own research, understand the product features and risks, exercise due caution to assess and select products that suit your investment objectives and risk tolerance level. If in doubt, you should seek professional advice.
Suitability clause in the client agreement
Apart from the aforesaid SFC’s suitability requirements, there is a suitability clause in the client agreement which requires intermediaries to ensure product suitability if the intermediary solicits the sale of or recommends any financial product to the client. However, such clause in the client agreement will not apply if there is no solicitation or recommendation involved. This effectively means that the suitability clause cannot assist an investor if he/she purchases any financial products in a self-directed manner, including complex products.
Note: Complex products which are also derivative products traded on an exchange in Hong Kong or in a specified jurisdiction are not subject to the additional protective measures. This is because exchange-traded derivative products generally have standardized features and there are other existing requirements that apply to the sale of exchange traded derivative products. Click here for the list of specified jurisdictions for exchange-traded products.
4 July 2019