Discretionary Account Authority: Written Mandates and Supervision

An SFC intermediary generally needs the client’s specific authorization before each transaction. If the firm or an eligible licensed or registered person will trade without case-by-case instructions, the client must give written authority, the terms must be explained, the account designated as discretionary, and senior management must approve opening it. Ongoing supervision and suitability duties still apply.

Specific instruction is the default

A firm should not trade in a client account unless the client or a person designated by the client has specifically authorized the transaction before it is effected, or the client has granted a valid written discretionary authority. This distinction protects the client’s control over investments. A long-standing relationship, prior pattern, verbal conversation, or the employee’s belief that a trade is sensible does not create discretionary authority.

What written discretionary authority must do

The SFC Code permits a client to authorize the licensed or registered person, or an eligible employee who is also licensed or registered, to transact without the client’s specific instruction. The mandate should clearly identify who may act, the account, the scope of discretion, and any restrictions or investment parameters. The firm should explain the terms to the client before the authority is granted, including who is acting and in what capacity.

Identify the person acting

If the authority is granted to a firm employee or agent, the mandate should say so. If it is granted to an external person, it should make clear that the person is not the firm’s employee or agent. That distinction prevents confusion about who is responsible for the investment decisions and the firm’s supervisory role. The firm should verify the authority and retain evidence that it was properly executed.

Senior approval and account designation

Senior management should approve opening a discretionary account. The client agreement and the firm’s records should identify the account as discretionary. This designation helps operations, compliance, and supervision apply the right workflow. A staff member should not treat an account as discretionary merely because the client has historically accepted recommendations quickly or signed a generic client agreement.

Annual confirmation and renewal

The Code requires the firm to confirm at least annually whether the client wishes to revoke the discretionary authority. SFC guidance accepts a notification sent before expiry that explains the authority will renew automatically unless the client revokes it in writing before expiry. The firm should retain the notice and evidence of delivery, monitor responses, and stop discretionary trading if authority expires or is revoked. Do not assume silence where the renewal conditions were not properly met.

A mandate does not remove suitability duties

Discretionary authority determines who may initiate transactions; it does not authorize unsuitable recommendations or eliminate the need to act in the client’s interests. SFC guidance explains that discretionary services involve making and executing recommendations and remain subject to suitability obligations. The manager should review the mandate against the client’s current circumstances and objectives, and address material questions or changes rather than using the mandate as a blank cheque.

Supervision and records

The firm should implement controls to supervise discretionary accounts. Useful records include the signed mandate, scope and restrictions, senior approval, investment rationale, order and execution history, client communications, periodic reviews, and annual revocation notices. Supervisors should compare activity with the mandate, client profile, product permissions, and any concentration or risk limits. Exceptions should be documented and escalated.

Example: “You can handle it” is not enough

A client tells a representative, “You know my portfolio—just buy when you think it is a good time.” Unless the firm has a valid written discretionary mandate and has completed its approval and account designation steps, the representative should obtain specific authorization for each transaction. The client’s casual wording does not replace the formal authority required for discretionary trading.

What happens when authority ends

When the client revokes the mandate or it expires without valid renewal, the firm must stop placing discretionary trades. It may still process specific instructions from the client if otherwise permitted. Operations should update account flags promptly, notify relevant staff, and prevent queued model changes from executing under an ended authority. If an employee leaves, the firm must reassign or suspend the mandate in line with the agreement and policy.

Paper 1 takeaway

Discretionary trading needs written authority, clear explanation, senior approval, account designation, annual revocation confirmation, suitability, and ongoing supervision. Without the mandate, obtain transaction-specific instructions.

Points to carry into practice

A practical mandate review

A mandate review should test whether the document still describes the relationship the client actually has with the firm. Compare the named account, authorized decision maker, investment scope, restrictions, and any risk limits against the client file and system permissions. If the mandate says the manager may buy listed equities only, the order system and desk procedures should not permit an operator to treat that authority as permission for unrelated products or a different account. A change in client circumstances or objectives may also make an old mandate unsuitable even if it has not formally expired. Route material changes through the firm’s approval and client communication process rather than relying on an informal note.

Annual confirmation and renewal

At least annually, the firm should confirm whether the client wishes to revoke the discretionary authority. Keep evidence of the contact, the client’s answer, and any follow-up. This is not the same as requiring the client to sign a brand-new mandate every year. Where a mandate renews automatically, the client should receive notice before expiry and be given a clear opportunity to revoke it in writing. A missed reminder, returned mail, or unanswered message should be escalated under the firm’s procedure; silence should not be recorded as a positive confirmation if the process requires an affirmative response.

• Check the current Code, applicable SFC guidance, and the firm’s written procedure.
• Document authority, conflicts, client instructions, and supervisory decisions.