MiFID Suitability requirements ensure that investment firms providing investment advice or portfolio management have to provide suitable personal recommendations to their clients or must make suitable investment decisions on behalf of their clients.
Where a firm is providing these services, they must complete a suitability assessment, which involves obtaining information necessary to enable the investment firm to recommend to the client or potential client those investment services and financial instruments that are suitable for the client and, in particular, are in accordance with his or her risk tolerance and ability to bear losses.
Obtaining sufficient evidence that the client possesses sufficient knowledge and experience in the investment field relevant to the product/service being offered;
Gathering information on the client’s financial situation, including their ability to bear losses; and
Understanding the client’s investment objectives, including their risk tolerance. MiFID II added additional considerations in relation to completing cost benefit analysis when recommending switching of financial instruments to clients, enhanced suitability reporting and record keeping requirements.
In December 2021, the Central Bank of Ireland (CBI) published a ‘Dear CEO’ letter outlining their findings from the Common Supervisory Action (CSA) that was undertaken in credit institutions and MiFID investment firms across the European Economic Area (EEA). The CBI advised that the letter should be read in conjunction with the ESMA public statement outlining the results of the CSA. Many of the findings identified align with the ESMA findings.
The main findings were:
Firms must adopt a client-focused approach
The CBI observed an absence of a personalised, comprehensive and client-focused approach to suitability, prioritising positive client outcomes. Poor practices observed were inadequate training frameworks, poor reporting and disclosures to clients, and a failure to establish clear procedures for the identification of potentially vulnerable clients.
Firms must improve their assessment of clients’ knowledge and experience, financial situation and investment objectives
Firms are recommended to improve their assessment of clients’ knowledge and experience, financial situation and investment objectives, collecting all necessary information to recommend products/services that are suitable. Firms were reminded to consider all relevant information in their assessment, and not solely focus on client’s risk tolerance, ensuring that there are clear procedures in place for calculating client’s capacity for loss.
Firms were reminded that where digital channels are used in the suitability assessment, it must ensure that the requirements are adhered to.
Shortcomings were evident in poor record keeping, and retention of evidence, how the suitability assessment was conducted and how information was used to inform the recommendation.
Suitability reports need to be sufficiently detailed and personalised
The Suitability Report should be a personalised document that enables the investor to understand how and why a product has been deemed suitable for them, based on their individual circumstances.
The review found instances where Suitability Reports were not sufficiently detailed or personalised, with information on the client’s financial situation sometimes missing or limited and relied on automated templates and standardised wording that provides little value to clients.
As outlined in the ESMA findings, firms must reassess their suitability report to ensure they are avoiding a generic, ‘tick-box’ approach.
Guidelines will be published in Q3 2022.