The shortcomings in the implementation of the MiFID suitability requirement were identified as: failure to ask clients the right questions; failure to collect the necessary and relevant information; failure to interpret correctly the information provided by the client; and even where the right information is collected, failure to recommend a suitable investment.
ESMA stated that the new guidelines focus on the need for firms to “have in place appropriate arrangements to enable them to meet the suitability requirements on an on-going and consistent basis for any client, and irrespective of the distribution channel used.”
Before providing investment advice or portfolio management services, investment firms must ensure that any investment product recommended is suitable for the client in question.
Therefore, investment firms must obtain the necessary information to be able to understand the essential facts about the client in order to assess the suitability of any investment for that client. This includes information about a client’s investment objectives, financial situation and knowledge and experience.
Based on the information collected, an investment firm must assess whether the specific transaction to be recommended or entered into in the course of providing portfolio management service is suitable.
Steven Maijoor, ESMA chair, said:“These new guidelines will provide clarification for market participants and national authorities on these key investor protection requirements, and ensure that we promote greater convergence in interpretation and supervisory approaches across the EU.
“The implementation of these guidelines will contribute to a system of pan-European safeguards which will allow investors to benefit from the same levels of protection regardless of where they are investing.”
Under the new guidance, before providing investment advice or portfolio management services, investment firms must ensure that any investment product recommended is suitable for the client in question, ESMA states.
Therefore, investment firms must obtain the necessary information to be able to understand the essential facts about the client in order to assess the suitability of any investment for that client. This includes information about a client’s investment objectives, financial situation and knowledge and experience.
Based on the information collected, an investment firm must assess whether the specific transaction to be recommended or entered into in the course of providing portfolio management service is suitable.
This second set of guidelines are focused on the responsibilities of the compliance function for monitoring, reporting and advising: the organisational requirements of the compliance function for the standards of effectiveness, permanence and independence; the extent of interaction of the compliance function with other functions, and the outsourcing of the tasks of the compliance function; and approaches for competent authority review of compliance function requirements.
ESMA states that the guidelines will be translated into the official languages of the European Union (EU) and published on ESMA’s website. There is a two month window following the publication of the official translations to confirm compliance or intention to comply, with reasons for non-compliance, to ESMA. The guidelines will then apply 60 days after the end of the reporting period for competent authorities.
To view ESMA/2012/387 final report see guidelines on certain aspects of the MiFID suitability requirements.
To views ESMA/2012/388 final report see guidelines on certain aspects of the MiFID compliance function requirements.
