Sophisticated High-Net-Worth Investors

The growing number of high-net-worth individuals across Asia means that wealth management services are increasingly in demand. Banks in Hong Kong are ideally placed to offer these clients the expertise they need, but they need to have the right products on offer, supported by a sales process that ensures clients are able to easily and efficiently invest in the products available while providing an appropriate level of investor protection. 

The availability of a broad range of investment products, including relatively sophisticated complex products, is a key part of Hong Kong’s attractiveness as a wealth management hub. However, the suitability requirements that has developed over the last decade in Hong Kong to protect investors who may not sufficiently understand investment products and their associated risks has been seen by some in the industry as excessive when servicing sophisticated and knowledgeable customers. 

To ensure that Hong Kong remains competitive in this area, the Hong Kong Monetary Authority and the Securities and Futures Commission have recently been engaging the private wealth management industry to review Hong Kong’s wealth management framework, and have proposed a new Sophisticated High-Net-Worth Investor (SHNWI) initiative to streamline or waive selected requirements of the process of product suitability and risk disclosure.

The proposal aims to ensure that the regulators take a balanced approach regarding the obligations placed on wealth managers when serving sophisticated high-net-worth investors. In practice, this means a regulatory regime that is user friendly for customers while still being robust enough to provide investor protection. 

The Hong Kong regulators have occasionally received feedback that some customers have experienced delays in being able to access investment products. Sometimes, this has been due to the prescriptive product suitability and risk disclosure processes, which may seem excessive for seasoned investors.

But it is also because some banks have been cautious in making these judgements. For example, some banks have not made full use of the regulatory flexibility that is allowed, or they have adopted very conservative risk and concentration thresholds. Furthermore, some banks have been conducting additional suitability assessments that are not required. 

In this regard, banks are simply being prudent. Their compliance and internal auditor functions may have adopted more stringent measures to make sure there are no breaches of regulation. But this has led to a frustrating experience for some investors, who have had to endure a lengthy investment product selling process due to the bank’s strict requirements. 

At the same time, taking a very conservative suitability approach means that banks might be missing out on the business opportunities in this dynamic and growing segment of the market.  

The SHNWI initiative was proposed in response to concerns from some customers that the selling process was overly long and complex, as well as requests from the industry for more regulatory guidance. With other jurisdictions also competing for the investible assets of the region’s ultra-high-net worth investors, there is a strong incentive for Hong Kong to make sure that the city’s wealth management framework allows flexibility to enhance customer experience while providing appropriate investor protection. 

The initiative aims to reduce or remove undue delay or obstacles from the selling process for sophisticated high-net-worth investors by streamlining areas of product due diligence, suitability assessment and product disclosure, while also providing proportionate investor protection. 

While the SHMWI guidance has not yet been finalised, it is expected that to qualify as a sophisticated high-net-worth investor, clients must have AUM of a certain level and must also be able to demonstrate that they have previous investment knowledge and experience, which can be from work or academic experience. Those investors that qualify will then be eligible for the streamlined processes and increased flexibility.

Ultimately, it will be up to the banks to decide if they want to adopt this flexibility. But it is expected that when the proposal takes effect, banks will be more confident in supporting the initiative given the clear guidance from the regulators. This will benefit both banks and customers: investors will enjoy easier access to the products they are interested in, while banks can conduct more business while offering a better customer experience. 

Other guidelines have been issued by the regulators in the past to help banks interpret the rules and understand exactly what is allowed in terms of regulatory flexibility. However, the SHWI initiative should provide greater clarification and ultimately help to attract more wealth management clients to Hong Kong. 

The cycle of regulatory requirements and guidelines around investment products has been seen before. After the global financial crisis and the related mini-bonds crisis in 2008 that affected many Hong Kong investors, regulatory measures were tightened significantly, and the HKMA started issuing regulatory circulars on top of the SFC requirements. After a decade or so, regulations had eased somewhat, but banks in Hong Kong have remained relatively cautious.

Regulators have a difficult balancing act in terms of the guidance they provide. If it is too prescriptive, banks don’t have the leeway to serve their customers well. But a more flexible environment can lead to overly prudent practice as banks don’t want to take the risk or possibly misunderstand the regulatory standards. 

The SHNWI initiative is therefore a welcome development that should strike a good balance between continuing to offer investors a high level of protection while also encouraging banks to make use of the allowed flexibility to provide prompt and comprehensive services to their sophisticated high-net worth investor clientele. It will also help Hong Kong to demonstrate its credentials as a hub for wealth management with an evolving regulatory framework that supports the development of the industry and is tailored to allow banks to best serve and protect different types of clients.