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ESMA Guidelines on the Client Suitability Requirements under MiFID

2012年 7月 11日

Introduction

On 6 July 2012, ESMA published guidelines on certain aspects of the MiFID suitability requirements – ESMA/2012/387 (the "Guidelines"). The Guidelines apply to investment firms, UCITS management companies and credit institutions ("Relevant Entities") that provide the investment services of investment advice and/or portfolio management (to retail clients and in some circumstances individual professional clients) as set out in Section A, Annex I of Directive 2004/39/EC ("MiFID"). The applicability of the Guidelines to UCITS management companies is limited to the provision of ‘individual’ portfolio management and/or investment advice.

The purpose of the Guidelines is to clarify the application of MiFID’s suitability requirements with the aim of enhancing investor protection. Essentially, the Guidelines represent a range of requirements that must be met by an investment firm when dealing with retail and individual professional clients in the provision of investment advice or portfolio management services.

Implementing the Guidelines

As the Guidelines are clarifying obligations already in place under MiFID, Relevant Entities will already be required to adhere to the key principles underlying the Guidelines. However, in terms of detailed requirements, the Guidelines introduce new obligations.

In light of the Guidelines, it may be prudent to carry out a gap analysis to ensure adequacy and effectiveness of client procedures.

This update does not propose to consider the Guidelines in full. However, as an illustration of what new requirements are likely to impact on Relevant Entities, Guideline 1 and 2 are considered below:

Guideline 1

Suitability assessment of clients is required for recommendations to ‘buy’ but also to ‘sell’ or ‘hold’ financial instruments. Clients should be informed as to the reason of the suitability assessment and Relevant Entities should ensure clients understand the relationship between risk and return (set out examples of a projected loss situation).

It is important to document the client’s response to the above examples and carry out a suitability assessment in accordance with the response. This may be an important factor in mitigating against any future regulatory action or client complaint to the Financial Services Ombudsman on the grounds of the investment being unsuitable.

Guideline 2

Adequate policies and procedures must be in place to understand clients and investments. Existing policies and procedures may need to be reviewed and a gap analysis carried out to ensure any client questionnaires are adequately detailed to cover off questions posed to clients such as:

• Marital status and family situation;

• Age (and retirement age);

• Employment capacity;

• Financial capacity; and

• The requirement to have access to investment at short notice (i.e. liquidity type).

When carrying out this gap analysis, Relevant Entities should be cognisant of the laws surrounding data privacy. If Relevant Entities are using ‘cloud services’ to maintain their records, a review should be carried out on the location of the ‘cloud’, the data privacy policy, and data protection agreements, particularly where ‘sensitive personal data’ is present and/or the ‘cloud’ is based in a jurisdiction outside the EU/EEA.

Other Guidelines

The Guidelines cover a range of other elements including:

• Staff engaged in the suitability assessment process - skills and expertise requirements;

• Requirement to document and retain records relating to suitability assessment and its outcome;

• Reliability verification on information provided to clients;

• Ongoing business relationship record; and

• Processes for dealing with groups of persons or entities.

Timing

There is a lead in time of two months following publication of the Guidelines by the Central Bank of Ireland (the "CBI") and full adherence will be expected.

If you would like more information on the Guidelines or would like to discuss the potential implications for your business and the recommended measures to ensure adherence with the Guidelines, please contact one of the following or your usual Maples and Calder contact.


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