Nowadays investors, particularly the high net worth (HNW) or those with more than US$1 million in assets, find themselves having to do more paperwork and documentation whenever they buy a new product or make a new investment.

While it definitely requires more time and effort, sometimes even extra cost, the additional paperwork or documentation stems from increasing regulations requiring private banks to improve their client investment suitability and risk controls. The ultimate objective is enhancing investor protection.

Although regulators have been tightening up on client investment suitability requirements since the global financial crisis, in the past two years regulators have become extra diligent with pushing intermediaries, particularly private banks, to sharpen their risk controls.

“That’s because the regulators find that some of the banks have been quite weak in risk controls and there have been a number of legal cases going on where clients sue the bank for misselling or failure in performing their fiduciary duty. The SFC (Securities and Futures Commission) and HKMA (Hong Kong Monetary Authority) have both stepped up on the regulatory requirements around client suitability to ensure that banks sell the right products to the right clients at the right time. So investor protection is the main objective of all the regulators,” says Steven Seow, head of Wealth Management, Asia at Mercer.

In response, the private banks are tapping the skills of financial consultants like Mercer to provide them with independent expertise and opinion on risk control procedures and practices that can strengthen their capability to comply with new regulatory requirements on client investment suitability.

For example, a consultant can build a client risk profile questionnaire for a private bank. “It’s a simple questionnaire with 10 questions and each question will have a different weight. Thereafter the bank will use that to interview their clients so they can determine the client’s individual risk profile. With this questionnaire, the bank can also assess a client’s capacity to take on risk as well as their willingness to take on risk,” Seow says.

Consultants can also play a role in measuring the risk rating of specific investment products for the private banks and their clients. “We will develop a model comprised of different risk factors like volatility, trading frequency, counterparty risk, etc. The bank will then use that model to risk rate individual products such as individual bonds, funds, or structured products,” Seow says.

The private banks are requiring more documentation from their clients to comply with the new regulations and Seow admits that there have been complaints from HNW clients who have to contend with the increased paperwork and documentation.

“They have to spend more time doing the documentation and be more transparent with the sources of their assets. Risk management in general has definitely become a huge part of the market environment in the last year and I do see that this trend will continue,” Seow says.