On 19 December 2012, ESMA issued two Supervisory Briefings on MiFID “suitability” and “appropriateness” requirements.
The Briefings are intended to promote common supervisory approaches and practices amongst Member State competent authorities (“supervisors”) to the relevant MiFID rules and to act as a useful starting point when deciding on areas of supervisory focus. The Briefings summarise the key elements to the relevant rules and explain the associated objectives and outcomes. The Briefings also include indicative questions that supervisors and MiFID firms could ask themselves when accessing a firm’s approach to the application of the relevant “suitability” and “appropriateness” rules.
The Briefings are not intended to be exhaustive, do not constitute new policy and do not promote any particular way of supervising the rules.
MiFID imposes requirements on firms when they provide “investment advice” or “discretionary portfolio management services” which include a requirement to ensure that any personal recommendations made or any discretionary investment decisions taken on behalf of clients are “suitable” for each client. The MiFID suitability rules give firms a certain degree of flexibility in complying with the duty to obtain the necessary information about the client’s circumstances and using this information in making recommendations or taking investment decisions. The Briefing is designed to help supervisors to judge whether appropriate arrangements are in fact in place to obtain the necessary information from clients and to ensure suitability when providing investment advice or discretionary portfolio management services.
MiFID “appropriateness” requirements apply to firms which provide MiFID investment services other than investment advice or portfolio management (in which cases the obligation is to assess “suitability”). The appropriateness test applies to firms when performing “non-advised” services such as receiving or transmitting orders, executing orders on behalf of clients, dealing on own account, underwriting and placing. Where the appropriateness test applies, it requires a firm to seek information from a client/potential client about his knowledge and experience to understand the risks about a specific type of product or service so as to enable the firm to determine whether that product or service is appropriate to the client. Certain exemptions are available in respect of “professional” clients and for certain types of “execution-only” business.
MiFID firms would be well advised to review and, where necessary, recalibrate their current procedures and arrangements in relation to “suitability” and “appropriateness” so as to ensure that the areas covered by the MiFID Briefings are included in their arrangements and properly recorded. These Briefings are likely to be used by supervisors such as the Central Bank in any reviews of a firm’s compliance with MiFID legislation.