Compliance

Defining Professional Investors: Focus On Dubai, Singapore And Hong Kong

Chris Hamblin, Compliance Matters, Editor, 6 November 2013

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Chris Hamblin examines the rules that surround this peculiar class of client in the financial hubs of Dubai, Singapore and Hong Kong and concludes that, far from being an excuse for corner-cutting, the entire subject is a troublesome minefield.

In this article Chris Hamblin, editor of Compliance Matters and Offshore Red, sister publications to WealthBriefingAsia, examines the rules that surround this peculiar class of client in the financial hubs of Dubai, Singapore and Hong Kong and concludes that, far from being an excuse for corner-cutting, the entire subject is a troublesome minefield.

THE PROFESSIONAL CLIENTS OF DUBAI

Dubai’s relevant provisions are to be found in the conduct-of-business
or COB module of the DFSA’s
rulebook. COB 2.2, guideline 4, states that any authorised firm can
choose to deal with a professional customer as though he is merely
a retail customer if it so desires. A client is always a retail client to
the extent that he is not a professional client (2.3.5). COB 3.2.4(1)(c)
states that if any marketing material is intended only for professional
clients, it has to bear a clear statement to that effect which says that
nobody else should act upon it.

COB 3.2.5 obliges every authorised firm to take reasonable steps to
ensure that marketing material for professional clients does not go to
anyone else – the onus for this might fall on the relevant relationship
manager.


SUITABILITY OF ADVICE

When it comes to suitability assessments, COB 3.4.2(2) allows a firm
to limit the extent to which it considers suitability when making a
recommendation to, or transacting on a discretionary basis for, a professional
client as long as it has done two or three things beforehand.

  • Warned the client in writing that it will not consider suitability, or
    at any rate only to a certain extent in accordance with what it has
    outlined in the notice.
  • Obtained express consent from the client by persuading him to
    sign the notice.
  • Kept an eye on whether any discretionary portfolio management
    account it runs for the client is appropriate for him.

The accompanying ‘guidance’ suggests – as it does throughout COB
– that the firm might want to limit the client’s ‘professional’ status
to only a few of his objectives or to a limited product range. COB,
indeed, is riven with rules designed to make it easy for the private
bank or asset management firm to declassify someone as a
professional client.

As one would expect, COB 3.5.6 draws no distinction between ordinary
and professional clients when obliging firms to disclose any
potentially hidden ‘soft-dollar’ elements to their charges.

COB 6.9.2(1) states that when an authorised firm transacts for a client
it must send that client a confirmation note as soon as possible
and in any case no later than two business days upon execution of
the transaction. This, however, is waived for professional clients as
long as they have asked for waivers in writing, according to note (4).

On the subject of what the DFSA calls ‘core information’, i.e. the information
that the RM or his or her firm must give the client no matter
what, COB A2.1.2 contains chapter and verse. It dictates that retail
clients must receive data about:

  • (a) the firm’s name, address, whether it is a subsidiary or not, and
    the name and address of its ultimate holding company;
  • (b) its regulatory status;
  • (c) when and how the client agreement is to come into force and
    how to end it;
  • (d) the services it is to provide, along with information about
    restrictions or a declaration that there are none;
  • (e) fees, costs and other charges and what engenders them;
  • (f) any conflicts of interests (dealt with in rule 3.5.1);
  • (g) any soft-dollar agreement that should come to light under rules
    3.5.6 and 3.5.7; and
  • (h) complaint-handling procedures.

Professional clients, however, need not receive (d), (e), (f), (g) and (h).

Appendix 5 contains the DFSA’s client money provisions, which govern
conduct for firms that handle such monies and oblige each one
to send each customer a statement of total client money balances
held, the amount, date and value of each credit and debit and any
interest earned or charged. A5.10.1(1) obliges a firm to send a statement
to a retail client at least once a month but it can do so at other
agreed intervals with a professional client. The same kind of arrangement
applies under A6.8.1 for firms that provide custodial services –
here the statement must be every six months except at the express
written order of the professional client.

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