The Monetary Authority of Macao (AMCM) has been aligning its activity with the development of the financial markets and products in the Macau Special Administrative Region (MSAR), especially given the significant increase in the number and type of financial products available to the public and professional investors.
In June 2019, in advance of the China Ministry of Finance's issuance of renminbi sovereign bonds, the AMCM issued Circular 007/B/2019-DSB/AMCM (Simplified Procedures for the Sale of People's Republic of China Sovereign Bonds) to simplify the relevant selling process of Chinese sovereign bonds to investors in general.
More recently, in January 2021, the AMCM issued a circular regarding the provision 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 built on the relevant provisions of Circular 033/B/2010-DSB/AMCM (Guideline on the Provision and Distribution of Financial Products).
As professional investors are generally viewed as a catalyst or pillar of an efficient financial market, this circular aims to further develop a more sophisticated regulatory environment in the MSAR.
Definition of professional investor
The Guideline on the Provision and Distribution of Financial Products defines a 'professional investor' as:
- an individual with a portfolio of at least MPtc8 million (approximately $1 million) (this includes individuals on a joint account with their associates); or
- a corporation or partnership that has either a portfolio of at least MPtc8 million or total assets of at least MPtc40 million (approximately $5 million).
Professional investors' access to new financial products
In accordance with the same guideline, the AMCM may, at its discretion, allow a bank that has already submitted certain required information(1) to launch a new financial product before submitting the remaining required information.(2) The conditions for the AMCM to exercise such discretion include as follows:
- the bank will provide or distribute the new financial product only to:
- customers which are professional investors; or
- selected customers through a private placement arrangement acceptable to the AMCM;
- based on separate procedures, the AMCM is satisfied that the bank has adequate systems to manage and control the related risk; and
- the bank has agreed to submit the remaining required information to the AMCM before the end of the second business day following the launch of the new financial product.
Further, the guideline provides that before providing or distributing a new financial product, the bank should ascertain whether a person meets or continues to meet the definition of professional investor set out above and maintain a proper record of the ascertainment.
In furtherance of the definition and ascertainment of professional investors, the new circular makes clear that when providing or distributing financial products to professional investors, a bank must not assume that a professional investor is:
- more knowledgeable and experienced in investment; or
- capable of making an adequate investment decision.
Therefore, the new circular requires that when providing or distributing financial products to professional investors, a bank must follow all of the requirements, rules and standards of business conduct set out in the Guideline on the Provision and Distribution of Financial Products, particularly those relating to:
- the know-your-client (KYC) procedure;
- the assessment of clients' risk appetite and tolerance;
- the implementation of a process to assess a product's adequacy; and
- the implementation of an adequate sales process.
KYC procedure
When creating a new investment account or conducting subsequent regular or qualitative reviews, the bank must take reasonable procedures to understand the customer's background, such as their:
- education;
- investment knowledge and experience;
- investment target;
- financial status; and
- specific needs.
Assessment of client risk appetite and tolerance
Banks must use the acquired customer information to analyse and evaluate customers' risk appetite and ability to tolerate these risks. This includes anlaysing customers' financial asset portfolios and providing them with a copy of the risk assessment. Banks should keep complete records of the analysis process, including documents which evidence the risk assessment (eg, audio and video recordings and customer confirmation of the risk assessment results). The procedures for assessing customer risk profiles must be separate from the sales process.
Implementation of process to assess product adequacy
Banks must establish and implement appropriate evaluation procedures for financial products to ensure that any form of recommendation, solicitation or suggestion aligns with the customer's risk appetite and tolerance. Any assessment made for the elderly or illiterate or otherwise disadvantaged persons (vulnerable persons) should fully consider the customer's personal situation, especially the investment period and risk of death. Banks should also keep appropriate documents or audio or video recordings to check the compliance and applicability of the assessment procedures.
Implementation of adequate sales process
During the sale of a product, banks must clearly indicate and explain the main features and risks to customers. If the purchase of financial products requires financing, banks must clearly list the overall and specific risks of the relevant investment and financing arrangements, along with other potential risks and losses, to enable the customer to be fully responsible and aware of their current circumstances while making these investment decisions. Regarding vulnerable persons, the bank must take appropriate measures in accordance with relevant guidelines to ensure that this customer group can clearly understand the product's risks.
When selling a product, the bank must keep relevant audio or video records or declaration documents signed by the customer which prove that they have understood the main characteristics and risks of the financial product and are willing to bear the relevant risks. If there is a risk mismatch, the bank must keep a complete record of the customer's clear direction and agreement to bear the relevant mismatch risk. Further, this must be authorised by the handling staff member's supervisor.
Circular 001/B/2021-DSB/AMCM is part of the AMCM's continuous effort to keep up with the development of the financial markets and products in the MSAR. It will also contribute to the development of a securer and more sophisticated regulatory environment in the region.
Endnotes
(1) Information required under Paragraph 8(b) of the guideline – namely, the documents or information specified under Part A of Appendix 1 of the same guideline (ie, procedural manual, code of conduct, internal control guidelines and eligibility policy).
(2) Information required under Paragraph 8(a) and (c) of the guideline – namely, the documents and information specified under Part B of Appendix 1 of the same guideline (ie, product-specific information).
