Discretionary account trading authority under the SFC Code

A discretionary account lets an intermediary trade for a client without asking for separate approval before every transaction. That convenience changes the authority the client has delegated; it does not remove the firm's duties to handle the account properly. SFC Code of Conduct paragraph 7.1 sets controls around granting, recording and reviewing that authority.

Start with the default: transaction-specific authorization

Before effecting a transaction, a licensed or registered person should have the client's specific authorization or written authority from the client to trade without transaction-by-transaction instructions. If the client has not granted discretionary authority, staff should not infer it from the client's silence, past practice or a general request to “manage the account.” The written mandate defines the authority and any restrictions.

Explain and document the mandate

The intermediary should explain the terms of the discretionary authority to the client. If the authority is given to an employee or agent, the document should make clear that the person acts as an employee or agent of the intermediary. The client agreement and the firm's records should identify the account as discretionary. Senior management should approve opening such an account. Those controls make the scope visible to the client, supervisors and people handling orders.

Reconfirm whether the client wants to revoke it

At least annually, the intermediary should confirm whether the client wishes to revoke the authority. The Code permits a notification before expiry that tells the client the mandate will automatically renew unless the client revokes it in writing before the expiry date. An annual review is therefore not merely a back-office date check: the client must be given a clear opportunity to reconsider the delegation.

Authority does not waive other conduct duties

A discretionary mandate answers who may make trading decisions without asking on each order. It does not make unsuitable products suitable, authorize activity outside the mandate, or excuse conflicts and poor records. The firm still applies its client-protection, suitability, best-interest, supervision and recordkeeping duties that govern the transaction and the client's account.

Exam sequence

1. Check whether the mandate is in writing and comes from the client or an authorized person.
2. Confirm that its scope covers the trade and the staff member involved.
3. Look for an explanation of the authority and the required discretionary-account designation.
4. Check senior-management approval before opening the account.
5. Check annual confirmation and whether the client has revoked or restricted the mandate.
6. Apply all other conduct rules to the trade separately.

Key takeaway

Discretionary authority must be explicit, written, explained, recorded, approved and revisited. It authorizes a defined decision-making arrangement; it is not a waiver of the firm's continuing duties.

Authority must be clear and bounded

A discretionary account allows an intermediary or manager to make investment decisions without seeking approval for each transaction, but it does not create unlimited authority. The written mandate should clearly describe the scope of discretion, investment objectives, permitted instruments, risk limits, benchmark if any, reporting, fees, termination and any restrictions. The firm should confirm the client understands the arrangement and that the person granting authority is entitled to do so. Ambiguous oral instructions should not silently expand the mandate.

Suitability, conflicts and best execution still matter

Discretion changes who chooses the transaction; it does not remove duties to act honestly, fairly and in the client’s interests. The manager should make decisions consistent with the mandate and client profile, manage conflicts, allocate aggregated orders fairly and avoid excessive trading for commissions or activity targets. Personal trades and related-party transactions need controls. A firm should monitor concentration, turnover, performance and deviations from agreed limits, with independent escalation when a manager repeatedly trades outside the mandate.

Setup and monitoring workflow

Before the first trade, verify the agreement, risk profile, investment objective, funding and any client restrictions. Configure system limits so the mandate is operational rather than merely documentary. Periodically compare holdings and transactions with the agreed strategy, review complaints and unusual turnover, and deliver required account information. If the client changes objectives or withdraws authority, record the change, stop discretionary trading where required and reconcile open orders. A delegated portfolio manager remains subject to oversight; outsourcing does not remove the firm’s responsibility to supervise.

Example and exam traps

Suppose the mandate permits listed equities but the manager buys a leveraged derivative after a client casually mentions being “open to ideas.” That comment does not necessarily amend the written authority or establish suitability. The manager should check the product, mandate and applicable approval requirements before acting. In an exam scenario, distinguish a discretionary mandate from transaction-by-transaction authority, and distinguish discretion from a general power to use client securities. Do not assume client consent to management also authorizes custody, collateral transfer or conflicts of interest.

Implementation and review

The firm should distinguish portfolio management decisions from execution and custody roles, especially when affiliated entities provide multiple services. Conflicts can arise in broker selection, soft-dollar arrangements, affiliated products, allocation and valuation. Disclose and manage them under applicable requirements, and use independent oversight where appropriate. Client reporting should let the customer compare activity and holdings against the mandate without implying guaranteed results. A manager who has discretion should document why a trade advances the client’s objectives, not merely that the account permitted the instrument.

A practical review checklist

Performance review should consider risk and mandate compliance, not returns alone. A manager who exceeds agreed limits may create unacceptable client risk even during a profitable period. Conversely, a loss does not prove that the manager breached duty if the position fit the mandate and was managed appropriately. Review should sample trade rationales and compare them with client objectives, portfolio limits and disclosure. Repeated unexplained deviations should trigger independent escalation and may require reducing or suspending trading authority.