1B.5 Securities dealing practices and skills
How a representative onboards, profiles, classifies and services a client, and the conduct standards — best execution and internal controls — that apply to the trading itself.
5.1 Onboarding
Section titled “5.1 Onboarding”Onboarding combines AML/CFT KYC with investment profiling. Gather identity/background, objectives, experience, financial capacity, employment/retirement status, structures and investment horizon. Use simplified CDD only for genuinely low-risk cases; use EDD for high-risk clients such as PEPs, high-risk businesses and opaque structures.
5.2 Investor categories and profiling
Section titled “5.2 Investor categories and profiling”| Category | Who | Protection |
|---|---|---|
| Accredited investor (AI) | individuals meeting prescribed net-asset, financial-asset or income thresholds; entities/trusts/partnerships meeting prescribed tests | opt-in and opt-out requirements apply |
| Institutional investor (II) | governments/statutory bodies, central banks, licensed banks/merchant banks/finance companies/insurers/trust companies, pension funds/CIS, CMS holders, exchanges/clearing houses, prescribed fund managers | — |
| Expert investor (EI) | persons whose business involves acquiring, disposing of or holding capital markets products; prescribed trustees/persons | — |
| Retail investor | everyone else | highest |
Correct classification affects disclosure, product access, SIP rules and exemptions. A risk profile should normally be independently reviewed under a four-eyes principle and explained to the client. Do not simply raise a risk rating because the client wants a riskier product; document any disagreement and advice. Consider mental capacity and coercion.
Before advice, obtain investment objectives, financial situation and needs. If the customer rejects the recommendation, document the decision and warn that the advice did not take those factors into account. Keep records, normally at least five years as good practice. Conflicts need not be repeated only while the prior disclosure remains accurate, complete and reasonably known; disclose again if stale or uncertain. A disclaimer cannot remove SFA/FAA liabilities.
5.3 Coherent investment/trading strategies
Section titled “5.3 Coherent investment/trading strategies”Explain the portfolio mix, asset classes, products, geographies, percentages and reasons for inclusion, and document why it matches the risk profile. Periodically report performance, explain variances and explain proposed strategy changes and time horizons.
5.4 Best execution
Section titled “5.4 Best execution”Best execution means reasonable steps to obtain the most advantageous overall result, considering price, costs, speed, likelihood of execution and settlement, size, execution quality and the client’s instruction. Written policies must provide best available terms and priority by time of receipt for comparable orders. Do not receive Payment for Order Flow. Monitor policy effectiveness and clearly disclose it.
Consider speed/likelihood in volatile markets, price improvement and total costs, size/liquidity, overall execution quality, client-specific instructions, all factors holistically, monitoring and written customer disclosure. Specific instructions govern specified parameters; unclear parameters are filled using best-execution principles. An agent executes under mandate; a principal trades on own behalf and must agree the trade. Cross trades must be in the best interests of both clients and never between staff personal and client accounts. Do not permit late trading in CISs. Quotes must be firm unless qualified; do not make frivolous quotes or park positions to conceal profit/loss. Only authorised staff should deal in FX/NDFs; off-market rollovers are a fraud risk.
5.5 Risk management and internal controls
Section titled “5.5 Risk management and internal controls”The board/senior management should approve proportionate policies, review them, maintain ethical codes, segregate duties, mark positions to market, report exposures/P&L at least daily, protect premises and systems, use independent valuation, reconcile independently, record calls/instructions, promptly confirm orders, validate settlement instructions and use stress testing, liquidity projections, margin and credit limits. Controls should cover suitability/risk disclosure, CDD, records, MIS, margin calls, liquidity, access, valuation, reconciliation, trade confirmation, funds transfers and escalation of unsuitable trades.
5.6 Account types
Section titled “5.6 Account types”- Personal: cash or margin; check funding, margin, authorised instructions and POA; death can trigger probate.
- Joint: clarify who may operate the account, mandates and joint liability; credit and dispute risks increase and death may freeze assets.
- Personal investment holding company: verify mandates, authorised operators, objectives, asset classes, geographies and portfolio restrictions.
- Trust: obtain the trust deed and identify trustee powers and authorised instructing parties.
- Corporate/institutional: verify board resolutions and authorised contacts, mandates and UBOs. Offshore SPVs require enhanced diligence, source-of-wealth/funds review, tax-residency/FATCA/AEOI information and careful tracing of ownership.
5.7 Trust-based client relationship
Section titled “5.7 Trust-based client relationship”Stay current on rules/products, communicate risk and costs, document, understand product/originator reputation, respect objectives, disclose conflicts, prioritise clients and seek best price. Relationship management is continuous; update KYC and financial circumstances, review discrepancies and communicate material facts, process, limitations, critical factors, fact/opinion distinction and records.
5.8 Credit risk
Section titled “5.8 Credit risk”Credit risk is loss when a counterparty cannot perform. Set credit strategy and limits by customer/group, industry, geography and risk tolerance. Assess financial capacity, repayment, credit history and collateral. Monitor margin and exposures; call for top-ups or liquidate under the agreement if collateral falls below threshold, and consider legal action if defaults continue.
Exam cues
Section titled “Exam cues”- Classification changes protection: retail gets the highest protection; AI/II/EI relax disclosure, product access, SIP rules and exemptions.
- Best execution is the most advantageous overall result — price, costs, speed, likelihood of execution and settlement, size, execution quality, and the client’s instruction. Never receive Payment for Order Flow.
- Agent vs principal: an agent executes under mandate; a principal trades on its own behalf and must agree the trade. Cross trades must benefit both clients and never mix staff personal with client accounts.
- Four-eyes review of the risk profile; specific client instructions override best-execution parameters for those parameters only.
- Trap: a disclaimer does not remove SFA/FAA liability; conflicts must be controlled, not merely disclosed.