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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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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