When drafting or negotiating contracts, there are numerous considerations and key factors businesses and consumers should take into account. In certain contracts, especially in financial services and a regulated space, additional questions of fiduciary, regulatory or statutory duties need to be considered.
On this matter, Lawyer Monthly hears from our next thought leader, Vivien Teu, regarding the complexity of contract drafting, and particular challenges in Hong Kong and its connections with China markets.
Vivien Teu is the Managing Partner of Vivien Teu & Co, a Hong Kong solicitors firm established in early 2015 which is in Association with a leading China law firm, Llinks Law Offices.
What is the type of client you most commonly deal with in contract negotiations and advisory in Hong Kong?
My clients are most commonly investment managers, investment product providers, financial intermediaries or other financial institutions such as banks or insurance companies. The contract negotiations and advisory work for such clients quite often relate to provisions around contractual obligations and the duties of investment managers, advisers, sponsors, service providers or distributors of investment products or investment arrangements, and on appropriate information and risk disclosures to investors.
What particular process usually takes place with these clients?
The financial services and investment management industry, and the offers of investments, are heavily regulated sectors and increasingly so. Therefore, in advising clients it is key to have a sound grasp of the regulatory landscape. This has been especially important also due to the pace of regulatory development internationally and a rapidly changing market. In addition, legal work in Hong Kong would quite often involve considering China, which brings added challenges to keep up with a market that has grown and developed tremendously, and undergone some uncertain drastic changes. We often need to take into account the current and prospective regulatory requirements that may apply to the immediate, medium and sometimes longer range commercial goals of the clients.
How has legal work in contract negotiation evolved throughout East-Asia since you entered the profession? What would you say have been the major game changers in this field over the last decade?
The increasing regulatory focus and consideration of China have certainly been two central themes in the evolution of legal work in this market since I entered the profession. Besides these, a major game changer in the last decade lies in the review of distribution models and practices on the sale of investment products, prompted by criticisms of bank-dominated distributions, high sale charges, questions of potential conflict of interests and investors’ claims for mis-selling. There is a clear trend towards an advisory model, and for advisers to act in the interest of the investor in investment recommendations.
Recently, the Hong Kong securities regulator has taken a further step of requiring financial intermediaries to incorporate a mandatory contractual obligation to ensure suitability of financial product recommendation or solicitation, and which expressly dis-applies any contractual provisions to the contrary. Compliance with this requirement is expected by June 2017, and financial intermediaries are to have commenced the process of revising and updating client agreements to include the prescribed clause verbatim. This requirement is issued with a clear stated intention of the regulator that “the new clause aims to enable aggrieved investors to seek redress as a contractual right under the client agreement” in such situation where an intermediary has breached suitability obligation. This is a significant change whereby a regulatory obligation is now in essence required as a contractual obligation, and is not without controversy in its impact on contracts.
At the same time, China regulators are now also engaged in reviewing product distribution platforms and practices in Mainland China, similarly introducing or proposing new rules on suitability of investments or otherwise imposing accountability of distributors of investment products.
As a thought leader, are there any legislative developments that you would like to see facilitate your work with contracts in Hong Kong?
Given our firm’s focus across Hong Kong and Mainland China, and considering the increasing cross-border activities that involve clients based in Hong Kong and Mainland China, I hope to see further and broader cooperation among industry participants and regulators of the two markets, in order to support stable and healthy development and evolution of the industry overall. Currently, cross-border cooperation exists, but mainly in cross-market access matters. Hong Kong has a strategic position and a wealth of international experience and infrastructure that can continue to play a very important role in the growth and expansion of China’s financial markets, and bridge gaps that still exist between China and international markets.
How has your previous in-house counsel experience helped with your thought leadership as managing partner now?
My in-house experience has certainly strengthened commercial and industry perspectives in my legal practice and thought-leadership.
Are you involved in any lobbying or activist groups in order to expand your thought leadership in the contracts sector?
We are members of key industry groups, where we regularly participate in industry discussions, deliver training to members, and contribute to lobbying efforts.
As a thought leader, how are you helping to develop or implement new legislation on contracts in Hong Kong?
Since the new requirement on suitability contractual obligation was issued, I have been involved in delivering seminars and training on this development, including as a trainer for the Hong Kong Securities and Investment Institute, to help deepen industry awareness and understanding of the requirements, issues and implications.
Is there anything else you would like to add?
Our focus has been and will continue to be on the Hong Kong-Mainland China cross-markets opportunities, and regularly advising the industry on the latest regulatory developments for China inbound and outbound initiatives in the securities and financial markets. As a further example, we have been very active in the past year in advising on the Hong Kong-Mainland China mutual recognition of funds arrangement, assisting in bringing Mainland funds to Hong Kong, and on Hong Kong funds for distribution in Mainland China. We have been fortunate to be able to contribute our China-based and international experience in working with the industry and the regulators, particularly in this new initiative that brings Mainland funds to the international market and international funds to Mainland China for the first time. Currently, our firm is also advising numerous international asset managers in considering the establishment of local investment management platform in China, as well as assisting China managers who are coming to Hong Kong to take to the international stage. We are certain these will lead to a new market paradigm.
