LE Paper 1 · Topic 5
This topic is where Paper 1 turns from law into day-to-day practice. Most questions give you a licensed representative or firm doing something ordinary (opening an account, taking a phone order, selling a bond, treating a client as a professional investor) and ask whether it breaches the SFC's Code of Conduct and what should happen next. The marks come from knowing the exact trigger for each duty: solicitation or not, exchange-traded or not, which type of professional investor, which paragraph. The fund manager, corporate finance adviser, credit rating, OFC and share registrar codes add a few scope questions.
11 min read8 sections
Checked October 2026 against the SFC Code of Conduct (33rd edition, January 2026) and SFC FAQ on paragraph 5.1A; the SFC 'Non-complex and complex products' list (updated 2 November 2023); the Securities and Futures (Professional Investor) Rules (Cap. 571D, version from 13 July 2018); the SFC circular on senior management accountability (16 December 2016); the Fund Manager Code of Conduct (5th edition, October 2024); the Corporate Finance Adviser Code of Conduct (October 2013); the Code of Conduct for Persons Providing Credit Rating Services (June 2011); the Code on Open-ended Fund Companies (September 2020); and the Code of Conduct for Share Registrars, all on sfc.hk. Independent prep, not endorsed by HKSI Institute or the SFC.
The Code of Conduct for Persons Licensed by or Registered with the SFC (33rd edition, January 2026) opens with nine general principles: honesty and fairness, diligence, capabilities, information about clients, information for clients, conflicts of interest, compliance, client assets, and responsibility of senior management. Specific paragraphs follow, such as best execution (3.2) and know your client (5.1). Under paragraph 1.4 the Code does not have the force of law and a breach does not by itself create liability, but it is admissible in SFO court proceedings and the SFC weighs any breach when judging fitness and properness.
GP9 and paragraph 14.1 put primary responsibility on senior management, judged by each person's apparent or actual authority. The SFC's 16 December 2016 circular says senior management includes directors, responsible officers and Managers-In-Charge (MICs).
Trap: best execution and suitability sound like general principles but are specific paragraphs, and an unlicensed desk head cannot escape responsibility by pointing to her title.
Takeaway: Nine GPs; the Code is not law but is evidence. Responsibility follows authority, and MIC changes are notified within seven business days.
Every note. Every question. One pass.
6 more sections of this note are part of Premium.
From ≈HK$49.83/mo on the Until-you-pass pass (12 months)
Paragraph 5.1 requires firms to establish each client's true and full identity, financial situation, investment experience and objectives. A non-face-to-face account opening must use a method that satisfactorily ensures identity. Paragraph 5.1A adds investor characterisation: assess each client's knowledge of derivatives. The SFC's FAQ lists the indicators as derivatives training or courses, derivatives-related work experience, or five or more derivative transactions in the past three years, and says a self-declaration alone is not enough.
| Client without derivatives knowledge, no solicitation | What the firm must do |
|---|---|
| Exchange-traded derivative (para 5.1A(b)(i)) | Explain the relevant risks of the product |
| Derivative not traded on an exchange (para 5.1A(b)(ii)) | Warn the client, advise on suitability, keep records; proceed only if in the client's best interests |
| Any derivative or leveraged service (para 5.3) | Be satisfied the client understands the risks and has enough net worth to bear losses |
When a firm recommends or solicits, paragraph 5.2 requires the suitability of that recommendation to be reasonable in all the circumstances. The client agreement must contain the paragraph 6.2(i) clause: a solicited or recommended financial product must be reasonably suitable, and nothing else the client signs derogates from that. Paragraph 6.5 bans any clause in which the client acknowledges no reliance on the firm's advice.
Trap: a signed 'I decided independently' statement or a ticked 'I understand derivatives' box changes nothing. Neither shifts the firm's duty.
Takeaway: Assess derivatives knowledge yourself. Recommend only what is reasonably suitable, and never ask the client to sign it away.
