Topic 5 of HKSI Paper 1: business conduct and client relations

Most candidates arrive at Topic 5 expecting law and find something stranger. The Code of Conduct is a code. It is not an ordinance, not subsidiary legislation, and breaching it is not in itself an offence. Yet a firm that ignores it loses its licence, because the Ordinance allows a failure to comply with the Code to be taken into account when the SFC decides whether you are fit and proper. No teeth, total force.

That paradox is the first thing the paper tests, and the wrong answer is always the one that says a Code breach is a criminal offence.

What does Topic 5 of the syllabus actually cover?

Six second-level headings, all of them codes issued by the SFC. One of them carries most of the weight.

If your study time is limited, spend it on row one. The specialist codes are examined at the level of what they are and who they apply to, not at the level of their internal paragraphs.

The nine General Principles, and the pair candidates transpose

Learn them as a list. They are short, they are memorisable, and questions quote them almost verbatim.

• Honesty and fairness: act honestly and fairly, in the best interests of clients and the integrity of the market.
• Diligence: act with due skill, care and diligence.
• Capabilities: have and effectively employ the resources and procedures the business needs.
• Information about clients: find out the client's financial situation, investment experience and investment objectives.
• Information for clients: disclose relevant material information in your dealings with them.
• Conflicts of interest: avoid them, and where you cannot, treat the client fairly.
• Compliance: comply with all regulatory requirements applicable to your business.
• Client assets: account for them promptly and safeguard them adequately.
• Responsibility of senior management: senior management bears primary responsibility for standards of conduct.

The fourth and fifth are a mirrored pair, and they are the ones people swap under time pressure. Information about clients is what you must find out. Information for clients is what you must tell them. Read the preposition, answer the question.

Know your client and suitability: how do they fit together?

Know your client comes first. Before you provide a service you establish who the client is, what their financial situation looks like, what they have invested in before and what they are trying to achieve. Suitability is built on top of that base. When a firm makes a recommendation or a solicitation, the suitability of that recommendation must be reasonable in all the circumstances, judged against what the firm knows or should know about the client.

Two consequences follow, and both appear in questions. Suitability is triggered by a recommendation or solicitation, so a genuine execution-only order does not engage it. And the standard is reasonableness, never a guarantee of performance. A recommendation that loses money is not automatically unsuitable. There is more detail in our guides to the know your client requirements and the suitability obligation.

What must a client agreement contain?

A written agreement, in place before services are provided, carrying specified content: who the parties are, the firm's licence status and CE number, the nature of the services, the remuneration. Then the part that matters. The agreement must include a suitability clause, and a statement that nothing else in the agreement and nothing said by the firm can derogate from it.

That anti-derogation wording exists because firms used to bury suitability disclaimers in the small print. Now they cannot. Questions on this heading usually offer you a plausible-sounding clause that limits the firm's liability, and the answer is that the clause is ineffective.

Do professional investors get an exemption?

Some, never all, and never automatically. Institutional professional investors - banks, insurers, licensed corporations, governments - attract the widest set of waivers. Corporate and individual professional investors who qualify on an assets basis attract fewer, and the firm has to assess them, obtain written consent to the treatment, and explain what they are giving up. That consent can be withdrawn.

Any answer option that waives everything for anyone labelled a professional investor is wrong. It is a reliable distractor because it sounds administratively tidy.

A worked example

How should you study Topic 5?

Drill it as recall, not comprehension. The General Principles, the required client agreement content and the professional investor tiers are all list-shaped, and a list you can recite in ten seconds is worth more here than an argument you can construct in two minutes. Ninety minutes for 60 questions leaves no room for reasoning from first principles.

Here is the concession. Topic 5 is genuinely one of the fairer parts of the paper. The language is plain, the obligations are intuitive, and once you have seen thirty questions on it you will start recognising the same four or five distractors. Compare that with the topics candidates actually find hardest and you will see why front-loading Topic 5 is a good use of a first week.