An examination of retail clients' investor suitability rules in the cobs and the lessons for China

• Author: An examination of retail clients' investor suitability rules in the cobs and the lessons for China
• Pages: 260-290

FRONTIERS OF LAW IN CHINA

VOL. 13 JUNE 2018 NO. 2

DOI 10.3868/s050-007-018-0017-5

ARTICLE

AN EXAMINATION OF RETAIL CLIENTS’ INVESTOR SUITABILITY RULES IN THE

COBS AND THE LESSONS FOR CHINA

ZHENG Weiwei*, DING Yu**

Abstract Nowadays, the complexity of financial products makes it difficult for retail

clients to identify investment risks, and there is an increasing tendency for firms,

stipulated by the maximum profits, to recommend or enter into unsuitable transactions to

or for retail clients while providing services of investment advice and portfolio

management, which causes great losses to a significant number of investors. So, in the

contemporary society, the investor suitability rules through which retail clients can

purchase suitable financial products are the indispensable legal basis of investor

protection. Currently, the regulations concerning investor suitability management in

China have several problems, including the chaotic legal system, low effectiveness level

and defective contents, which may make it difficult for suitability to be applied in justice

and managed effectively. Since the UK’s investor suitability rules in the Conduct of

Business Sourcebook that apply to retail clients whose contents include requirements of

obtaining retail clients’ information, requirements of information to be provided to retail

clients and criteria of assessing suitability are clear and comprehensive, the authors

believe that the UK’s experiences can provide a great enlightenment for China to better

investor suitability management rules, including integrating legal documents and

optimizing effectiveness level, rationalizing application scope, adding criteria of

assessing suitability and revising specific clauses.

Keywords retail clients, COBS, investor suitability rules, fiduciary duty, assessing

suitability, investor suitability management

INTRODUCTION .................................................................................................................... 261

I. LEGISLATIVE BACKGROUND OF INVESTOR SUITABILITY RULES ............................. 264

A. The First Modification....................................................................................... 266

* (郑维炜) Ph.D., School of Law, Jilin University of China, Changchun, China; Research Fellow, Law and

Technology Institute, Renmin University of China, Beijing, China; Associate Professor, School of Law,

Renmin University of China, Beijing 100872, China. Contact: smileweiwei1014@sina.com

** (丁宇) LL.M., School of Law, Renmin University of China, Beijing 100872, China. Contact:

shirley_ding0723@163.com

This article is supported by the Fundamental Research Funds for the Central Universities and the

Research Funds of Renmin University of China (Grant No. 13XNF007), and Young Innovative Research

Team in School of Law, Renmin University of China. All mistakes and omissions are my responsibility.

2018] AN EXAMINATION OF RETAIL CLIENTS’ INVESTOR SUITABILITY RULES 261

B. The Second Modification................................................................................... 267

C. Concluding Remarks......................................................................................... 268

II. INVESTOR SUITABILITY RULES IN THE COBS ........................................................ 268

A. General Overview of the COBS......................................................................... 268

1. Role of the COBS.......................................................................................... 268

2. Client Categorization..................................................................................... 270

3. Retail Clients’ Investor Suitability .................................................................271

B. Theoretic Foundation of Suitability as a Statutory Obligation ......................... 273

C. Examination of Retail Clients’ Suitability Rules ...............................................274

1. Assessing Suitability...................................................................................... 275

2. Information to Be Provided to Retail Clients ................................................278

III. REGULATING INVESTOR SUITABILITY MANAGEMENT IN CHINA: LEARNING

LESSONS FROM THE UK’S REGULATORY EXPERIENCE.......................................... 279

A. The Contemporary Situation of Regulating Investor Suitability Management in

China ................................................................................................................ 279

B. Some Problems and Challenges China Will Be Facing for Enacting Investor

Suitability Management.................................................................................... 282

1. Legal System and Effectiveness Level of Investor Suitability Management

Rules ............................................................................................................. 282

2. Main Contents of the Measures..................................................................... 284

C. Some Lessons That Can Be Learned from the UK’s Experiences .....................285

1. Integrating Legal Documents and Optimizing Effectiveness Level.............. 287

2. Rationalizing Application Scope................................................................... 288

3. Adding Criteria of Assessing Suitability........................................................288

4. Revising Specific Clauses.............................................................................. 289

CONCLUSION........................................................................................................................ 290

INTRODUCTION

With the development of the financial market, more and more retail clients1 have

participated in the investment activities. Because of the limited investment capability,

when they are facing complex and diversified financial products, instead of making

investment decisions all by themselves, retail clients are more inclined to approach

professional investment firms2 (hereinafter referred to as “firms”) for help, either heavily

relying on investment advisers’ recommendations or giving firms discretion to enter into

1 Retail clients are defined as clients who are not professional clients who possess the experience,

knowledge and expertise to make own investment decisions and properly assess the risks that it incurs. See

The COBS 3.4.1.

2 Investment firm is defined as any person whose regular occupation or business is the provision of one

or more investment services to their parties and/or the performance of one or more investment activities on a

professional basis. See FCA, Investment Firm, available at https://www.handbook.fca.org.uk/handbook/

glossary/G596.html (last visited Mar. 27, 2018).