The Supreme Court of Justice issued a decision on January 20, 2014, which has set a civil doctrine on the scope of the duty of information required in investment services which contain financial advice by establishing a distinction between the so-called convenience and suitability tests, and setting out instances for the application of each of them.
The existing disproportion between financial services distributors and its clients (if they are not professional investors) and in view of the complexity of these types of products, the High Court considers that the retail investors have to be specially protected.
To this end, using the Markets and Financial Instruments Directive (MiFID), the High Court has provided information on the duties required of the lending financial institutions, and how they should assist clients to interpret the information given and make an informed decision.
The scope of duties of information and advice aimed at retail investors on complex financial products should not be reduced to simply partial, clear and not misleading information but must also consist of a detailed description of the product to be hired, as well as the characteristics of the risks inherent to it. There should also be consideration on the classification of the client as either retail or professional, with the ultimate goal of putting the client in a position to make an informed investment decision.
In addition, the explanation of the risks, according to the type of product, must include related risks, the volatility of the price on this type of instruments, additional costs the investor may have to take and any other obligations applicable to the financial instrument.
Financial institutions should also assess the knowledge and experience of financial matters that the client has and, accordingly, issue a judgment of convenience or suitability.
The suitability test will serve to determine whether the client has or not the required knowledge and experience to understand the risks from the product to be hired, assessing the instruments they are familiar with, frequency and volume of their transactions, and the education and profession.
In contrast, the suitability test will require greater demands, being provided for cases of investment or assets management advisory services, and will require a full examination of the client including the suitability test, a report on the financial situation of the customer, and the investment objectives.
Ultimately, the judgment of the suitability of the product, will include, inter alia in its content, the judgment of convenience, and will therefore be much more extensive.
Such judgment of suitability will therefore be required for financial advisory services which the High Court describes as personalized recommendations concerning one or several financial operations, whether at the customer’s request or at the initiative of the financial institution.
Once the fixed doctrine had been issued, the High Court confirmed the ruling, which had been subject to appeal, and declared null the contract of swap signed by Caixa d´Estalvis del Penedés with a retail investor, considering that there was error in his consent, having not received a comprehensive and adequate information of the risks of the operation and without practicing the judgment of suitability.