ESMA GUIDELINES

Guidelines on certain aspects of the MiFID suitability requirements (the “Guidelines”)

In July 2012 the European Securities and Markets Authority (ESMA) published its “Guidelines on certain aspects of the MiFID suitability requirements” applicable to both national competent authorities (in Ireland the Central Bank) and firms providing certain MiFID investment services.

When do they take effect?

The Guidelines became effective in Ireland on 23 December 2012, the Central Bank having already prior to that date formally declared its intention to comply with the Guidelines to ESMA.

To whom do they apply?

The Guidelines apply to the following firms:

  • MiFID investment firms;
  • credit institutions (banks) that provide MiFID ‘investment services’; and
  • UCITS management companies when they are providing the investment services of individual portfolio management or of investment advice within the meaning of Article 6(3)(a) and (b) of the UCITS Directive.

The Guidelines apply only in relation the provision of investment advice and portfolio management. Firms should note that the ESMA has, confirmed that “…although these guidelines principally address situations where services are provided to retail clients, they should also be considered as applicable, to the extent they are relevant, when services are provided to professional clients”.

What action is required?

Firms are not required to report on compliance or ability to comply with the Guidelines but it is recommended that they review and where necessary amend their processes and procedures - in particular, review the information which they provide to clients. Staff training may also need to be reviewed and updated.

Summary

The Guidelines are intended to provide clarification on the “…key investor protection requirements…” which are contained in MiFID and “… promote greater convergence in interpretation and supervisory approaches across the EU.”

Aimed at achieving a uniformity in approach at a pan-European level, they contain guidance on how firms can ensure that they have the right ‘suitability assessment’ policies and procedures in place for their business, how this information might be conveyed to clients, when it should be updated etc – all of which should, in turn, assist those clients in understanding why investment firms need to assess suitability.

Standards of knowledge and experience of appropriate staff are also addressed, as is record keeping. They are made up of nine general guidelines (set out below) with each general guideline further clarified and expanded on in a number of related supporting guidelines.

In advising on the Guidelines2, the Securities and Markets Stakeholder Group commented that, in its view:

“…a real and effective “consistent level” of investor protection regulation and supervision will only be achieved if the MiFID suitability provisions and ESMA Guidelines are extended to all other retail investment products…”;

in particular, confirming that the Group hoped that such consistency would be addressed in the upcoming Packaged Retail Investment Products Directive and Insurance Mediation Review.

General guidelines

The Guidelines are available here http://www.esma.europa.eu/system/files/2012-387.pdf

There are 9 general guidelines, relating to certain identified MiFID obligations. The general guidelines are set out below in italics:

  • General guideline 1 - suitability assessment, information to clients

Investment firms should inform clients, clearly and simply, that the reason for assessing suitability is to enable the firm to act in the client’s best interest. At no stage should investment firms create any ambiguity or confusion about their own responsibilities in the process.”

The supporting guidelines confirm that the suitability assessment applies to every recommendation made by a firm to buy, hold or sell.

Firms who provide MiFID investment advice and portfolio management are already obliged to provide certain information to clients. A firm will need to ensure that this includes clear information on the reasons for the suitability assessment.

  • General guideline 2 - arrangements necessary to understand clients and investments

Investment firms must have in place adequate policies and procedures to enable them to understand the essential facts about their clients and the characteristics of the financial instruments available for those clients.”

Examples of information which might be sought are given in the supporting guidelines (eg age, financial situation) but the guidelines intentionally do not prescribe in precise detail on the structure and content of policies, so as to allow firms tailor their own policies and procedures to their products and client base. Firms should ‘know’ the products they are offering.

  • General guideline 3 - qualifications of investment firm staff

Investment firms are required to ensure that staff involved in material aspects of the suitability process have an adequate level of knowledge and expertise.”

  • General guideline 4 - extent of information to be collected from clients (proportionality)

Investment firms should determine the extent of information to be collected from clients in light of all the features of the investment advice or portfolio management services to be provided to those clients.”

  • General guideline 5 - reliability of client information

Investment firms should take reasonable steps to ensure that the information collected about clients is reliable. In particular, firms should:

  1. not rely unduly on clients’ self-assessment in relation to knowledge, experience and financial situation;
  2. ensure that all tools employed in the suitability assessment process are appropriately designed (e.g. questions are not drafted in such a way that they lead the client to a specific type of investment); and
  3. take steps to ensure the consistency of client information.”
  • General guideline 6 - updating client information

Where an investment firm has an ongoing relationship with the client, it should establish appropriate procedures in order to maintain adequate and updated information about the client.”

  • General guideline 7 - client information for legal entities or groups

Where a client is a legal person or a group of two or more natural persons or where one or more natural persons are represented by another natural person, to identify who should be subject to the suitability assessment, the investment firm should first rely on the applicable legal framework

If the legal framework does not provide sufficient indications in this regard, and in particular where no sole representative has been appointed (as may be the case for a married couple), the investment firm, based on a policy it has defined beforehand, should agree with the relevant persons (the representatives of the legal entity, the persons belonging to the group or the natural persons represented) as to who should be subject to the suitability assessment and how this assessment will be done in practice, including from whom information about knowledge and experience, financial situation and investment objectives, should be collected. The investment firm should make a record of the agreement.”

  • General guideline 8 - arrangements necessary to ensure the suitability of an investment

In order to match clients with suitable investments, investment firms should establish policies and procedures to ensure that they consistently take into account:

  1. all available information about the client that is likely to be relevant in assessing whether an investment is suitable, including the client’s current portfolio of investments (and asset allocation within that portfolio);
  2. all material characteristics of the investments considered in the suitability assessment, including all relevant risks and any direct or indirect costs to the client.”

Firms that rely on tools in the suitability assessment process are reminded that tools that classify clients or financial instruments too broadly are not appropriate.

  • General guideline 9 - record-keeping

Investment firms should at least:

  1. maintain adequate recording and retention arrangements to ensure orderly and transparent record-keeping regarding the suitability assessment, including any investment advice provided and all investments (and disinvestments) made;
  2. ensure that record-keeping arrangements are designed to enable the detection of failures regarding the suitability assessment (such as mis-selling);
  3. ensure that records kept are accessible for the relevant persons in the firm, and for competent authorities;
  4. have adequate processes to mitigate any shortcomings or limitations of the recordkeeping arrangements.