Provision and distribution of financial products to professional investors – Commentary

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introduction
Definition of professional investor
Access of professional investors to new financial products
Importance of the new circular
Comment

introduction

The Macau Monetary Authority (AMCM) has aligned its activity with the development of markets and financial products in the Macau Special Administrative Region (SARM), particularly in view of the significant increase in the number and type of financial products available to the public and professional investors.

In June 2019, prior to the issuance of renminbi sovereign bonds by the Chinese Ministry of Finance, the AMCM issued Circular 007/B/2019-DSB/AMCM (Simplified Procedures for the Sale of Chinese Republic Sovereign Bonds People’s Republic of China) to simplify the relevant sales procedures. process of issuing Chinese sovereign bonds to general investors.

More recently, in January 2021, the AMCM published a circular relating to the supply and distribution of financial products to professional investors (Circular 001/B/2021-DSB/AMCM (Provision and Distribution of Financial Products to Professional Investors) ). This circular was based on the relevant provisions of circular 033/B/2010-DSB/AMCM (Directive on the supply and distribution of financial products).

As professional investors are generally seen as an enabler or pillar of an efficient financial market, this circular aims to further develop a more sophisticated regulatory environment in MRAS.

Definition of professional investor

The guideline on the supply and distribution of financial products defines a “professional investor” as:

  • an individual with a portfolio of at least 8 million MPtc (approximately $1 million) (this includes individuals on a joint account with their associates); Where
  • a corporation or partnership that has either a portfolio of at least 8 million MPtc or total assets of at least 40 million MPtc (approximately $5 million).

Access of professional investors to new financial products

In accordance with the same guideline, the AMCM may, at its discretion, authorize a bank that has already provided certain required information(1) launch a new financial product before submitting the rest of the required information.(2) The conditions for the exercise of this discretionary power by the AMCM are as follows:

  • the bank will provide or distribute the new financial product only:
    • clients who are professional investors; Where
    • clients selected through a private placement arrangement acceptable to the AMCM;
  • on the basis of separate procedures, the AMCM has ensured that the bank has adequate systems in place to manage and control the associated risk; and
  • the bank has undertaken to transmit the remaining required information to the AMCM before the end of the second business day following the launch of the new financial product.

In addition, the guideline provides that before providing or distributing a new financial product, the bank must verify whether a person meets or continues to meet the definition of professional investor set out above and keep an appropriate record of this verification.

Importance of the new circular

In line with the definition and verification of professional investors, the new circular specifies that when providing or distributing financial products to professional investors, a bank must not assume that a professional investor is:

  • better informed and experienced in investing; Where
  • able to make an appropriate investment decision.

Therefore, the new circular requires that when providing or distributing financial products to professional investors, a bank complies with all requirements, rules and standards of business conduct set out in the Guideline on the provision and distribution of financial products , in particular those relating to:

  • the know-your-customer (KYC) procedure;
  • assessment of clients’ risk appetite and tolerance;
  • the establishment of a process for assessing the suitability of a product; and
  • setting up an adequate sales process.

KYC procedure
When setting up a new investment account or performing subsequent regular or qualitative reviews, the bank should take reasonable steps to understand the customer’s background, such as:

  • education;
  • investment knowledge and experience;
  • investment objective;
  • financial status; and
  • specific needs.

Assessment of clients’ risk appetite and tolerance
Banks should use acquired customer information to analyze and assess customers’ risk appetite and ability to tolerate those risks. This includes analyzing clients’ financial asset portfolios and providing a copy of the risk assessment. Banks must maintain full records of the analysis process, including documentation evidencing the risk assessment (e.g. audio and video recordings and customer confirmation of risk assessment results). Procedures for assessing customer risk profiles should be separate from the sales process.

Establishment of a product suitability assessment process
Banks should establish and implement appropriate assessment procedures for financial products to ensure that any form of recommendation, solicitation or suggestion is consistent with the customer’s risk appetite and tolerance. Any assessment made for the elderly or illiterate or otherwise disadvantaged (vulnerable persons) must take full account of the personal circumstances of the client, in particular the investment term and the risk of death. Banks should also retain appropriate documentation or audio or video recordings to verify compliance and applicability of assessment procedures.

Implementation of an adequate sales process
When selling a product, banks should clearly state and explain the key features and risks to customers. If the purchase of financial products requires financing, banks must clearly list the overall and specific risks of the investment and financing agreements concerned, as well as other potential risks and losses, in order to allow the customer to be fully responsible. and aware of its current situation while making these investment decisions. Regarding vulnerable persons, the bank should take appropriate measures in accordance with the relevant guidelines to ensure that this group of customers can clearly understand the risks of the product.

When selling a product, the bank must keep relevant audio or video recordings or declaration documents signed by the customer which prove that he has understood the main characteristics and risks of the financial product and that he is ready to bear the corresponding risks. In case of risk mismatch, the bank should maintain a full record of the client’s clear instructions and agreement to assume the relevant mismatch risk. In addition, this must be authorized by the supervisor of the material handling staff member.

Comment

Circular 001/B/2021-DSB/AMCM is part of the AMCM’s ongoing efforts to monitor the development of markets and financial products in MRAS. It will also contribute to the development of a safer and more sophisticated regulatory environment in the region.

For more information on this subject, please contact Pedro Cortes Where Calvin Tinlop Chui at Rato, Ling, Lei & Cortés Advogados by phone (+853 2856 2322) or email ([email protected] Where [email protected]). The Rato, Ling, Lei & Cortés Advogados website can be accessed at www.lektou.com.

Endnotes

(1) Information required under paragraph 8(b) of the guideline – namely, the documents or information specified in Part A of Annex 1 of the same guideline (i.e. the procedures manual, code of conduct, internal control guidelines and eligibility policy).

(2) Information required under paragraphs 8(a) and (c) of the guideline – namely, the documents and information specified in Part B of Appendix 1 of the same guideline (i.e. the product-specific information).

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