United States
Hong KongKnow your client requirements in Hong Kong
Before providing services, an SFC-licensed firm must establish the client's identity, financial situation, investment experience and investment objectives, and keep that information current. Know your client is a Code of Conduct duty aimed at giving suitable advice. It overlaps with anti-money laundering due diligence but exists for a different reason.
There are two sets of client checks running through Paper 1 and candidates keep collapsing them into one. Know your client under the Code of Conduct exists so that a firm can advise properly. Customer due diligence under the anti-money laundering regime exists so that criminals cannot use the firm. The information collected overlaps heavily. The purpose does not, and the exam knows it.
- Source
- SFC Code of Conduct, General Principle on information about clients
- When
- Before providing services, and kept up to date afterwards
- Four pillars
- Identity, financial situation, investment experience, investment objectives
- Feeds into
- The suitability obligation and the client agreement
- Related but separate
- Customer due diligence under the anti-money laundering regime
What must a firm find out about a client?
Four things, and they are worth memorising in this order because the Code words them this way.
- Identity - who the client actually is, verified against reliable evidence, including the identity of the person ultimately responsible for originating instructions.
- Financial situation - income, net worth, and the capacity to bear loss.
- Investment experience - what products the client has dealt in before, and how recently.
- Investment objectives - what the client is trying to achieve, over what horizon, and with what tolerance for risk.
That information is not collected once and filed. It has to stay current, because a suitability assessment made against three-year-old facts is an assessment made against nothing.
Who is the client, and who is behind the client?
A firm has to know the identity of the person ultimately responsible for originating the instruction, not just the name on the account. Third-party instructions require written authority. An account operated by someone other than the holder needs the arrangement documented, and the firm needs to understand why it exists.
Omnibus accounts are the standard exam scenario. Where a firm holds an account for an intermediary who is in turn acting for underlying clients, the SFC can require the identity of those underlying clients to be provided. A firm that cannot obtain them has a problem it must resolve before it keeps trading.
How is know your client different from AML customer due diligence?
| Know your client | Customer due diligence | |
|---|---|---|
| Source | SFC Code of Conduct | Anti-money laundering legislation and the SFC guideline |
| Purpose | Advise and recommend suitably | Detect and deter money laundering and terrorist financing |
| Focus | Financial situation, experience, objectives | Identity, beneficial ownership, source and purpose |
| Breach | Disciplinary; goes to fitness and properness | Statutory, with criminal exposure in serious cases |
| Ongoing duty | Keep the client profile current | Ongoing monitoring of transactions and relationship |
One account-opening form usually captures both. That practical merging is exactly why questions separate them. If a stem asks why the firm must identify the beneficial owner, the answer is the anti-money laundering regime. If it asks why the firm must record the client's investment horizon, the answer is the Code. Our guide to the anti-money laundering obligations covers the other half in detail.
What happens if a client refuses to provide the information?
The firm does not simply proceed and note the refusal. Where a client declines to give financial information, the firm cannot then make recommendations as though it had a full picture, and it must be careful not to treat silence as consent to a risk profile it has invented. Documenting the refusal protects the file. It does not create a suitability assessment.
Where a client without derivative knowledge wants to trade a derivative product, the firm has to consider whether the transaction is suitable and explain the risks, rather than treating the client's instruction as the end of the matter. Questions in this area reward the cautious answer.
How does know your client feed into suitability?
Directly. The suitability obligation asks whether a recommendation is reasonable in all the circumstances, judged against information about the client that the firm is or should be aware of through due diligence. Weak know your client work therefore does not excuse a bad recommendation; it makes it worse, because the firm should have known. This is the causal chain the paper wants you to see, and it is set out in full in our suitability obligation guide.
How this gets examined
A client opens an account and declines to disclose net worth or income. She then asks the firm to recommend a high-yield structured product. What should the firm do?
- Recommend the product and record that the client declined to provide financial information
- Refuse to open the account, as financial information is mandatory in every case
- Decline to make the recommendation, because it cannot assess suitability without the information it should have obtained
- Recommend the product, provided the client signs a risk disclosure statement
A view on how much time this deserves
Know your client is one of the highest-yield hours in Topic 5, because the same four pillars reappear inside suitability, inside the client agreement content and inside the professional investor assessment. Learn it once and you have partly learned three other headings. That is unusual on this paper, where most facts pay out only where they sit.
Where our coverage is thin, and worth saying: the fine detail of account-opening documentation varies by firm and by product, and the syllabus stays at the level of principle. Do not memorise a specimen account-opening form. Learn what the firm must know and why.
Common questions
What are the four know your client pillars in Hong Kong?
Identity, financial situation, investment experience and investment objectives. A licensed firm must establish all four before providing services and keep the information current, because the suitability of any later recommendation is judged against what the firm knows or should know.
Is know your client the same as anti-money laundering due diligence?
No. Know your client sits in the SFC Code of Conduct and exists so the firm can advise suitably. Customer due diligence sits in the anti-money laundering regime and exists to stop the firm being used for laundering. They overlap in the information collected but not in purpose or consequence.
Can a firm accept instructions from someone other than the account holder?
Only with proper written authority, documented on the file. The firm must also know the identity of the person ultimately responsible for originating the instruction, not merely the name on the account.
What if a client will not disclose their financial position?
The firm can record the refusal, but it cannot then make recommendations as though it had a complete picture. Suitability is measured against information the firm should have obtained, so an incomplete profile limits what the firm may advise rather than excusing the advice.
Does know your client have to be repeated?
The obligation is continuing. Client information must be kept up to date, because a suitability assessment made against a stale profile is not reasonable in the circumstances. Firms typically refresh profiles periodically and on any material change.