On 29 January 2021, the European Securities and Markets Authority (ESMA) published a consultation paper on draft guidelines regarding certain aspects of the MiFID II appropriateness and execution-only requirements (Consultation Paper). The Consultation Paper will be of particular relevance to investment firms and credit institutions providing investment services and activities, investment firms and credit institutions when selling structured deposits and external alternative investment fund managers (AIFMs) when providing investment services.
The Consultation Paper contains draft guidelines, which have been created by ESMA in order to clarify and promote convergence in relation to the application of certain aspects of the appropriateness and execution-only requirements. In addition, the Consultation Paper takes into account the results of supervisory activities conducted by national competent authorities on the application of the appropriateness and execution-only requirements, in particular resulting from the 2019 common supervisory action (CSA) on appropriateness.
This CSA had highlighted that there was insufficient convergence within the EU in the understanding and application of several areas of the appropriateness and execution-only requirements. ESMA believes that the implementation of these guidelines should strengthen investor protection, which is a key objective for ESMA, as well as enhancing clarity and fostering convergence across the EU.
Appropriateness and Execution-only Rules
By way of background, the MiFID II appropriateness and execution-only requirements are set out under Regulation 33(5)-(9) of the MiFID II Regulations (S.I. No. 375 of 2017) and Articles 55 to 57 of the MiFID II Delegated Regulation (EU/2017/565).
Under MiFID II, firms providing "non-advised services" (i.e. services other than investment advice or portfolio management) are required to request specified information on the knowledge and experience of clients or potential clients to assess whether the investment service or product envisaged is appropriate, and to issue a warning in case the investment service or product is deemed inappropriate.
There is an exemption to these requirements for non-complex execution-only services provided that certain conditions are met, including that the services are provided at the initiative of the client, and that the firm takes all appropriate steps to identify and prevent or manage any conflicts of interest that arise. The firm must also warn the client that it is not required to conduct an appropriateness assessment and that the client, therefore, does not benefit from the corresponding investor protections.
When formulating the draft guidelines (set out in Annex III of the Consultation Paper) ESMA has used its MiFID II suitability requirements guidelines as a starting point, adjusting key aspects, such as 'know your product' and 'know your client', to the appropriateness and execution-only requirements. Furthermore, certain guidelines that were not relevant for the appropriateness assessment have been deleted, while others have been added on aspects not relevant for the suitability assessment. A summary of proposed new guidelines which are not replicated in the suitability requirements guidelines are set out below:
- Guideline 9 (Effectiveness of warnings): The warning issued by firms in case no information is provided by the client on his knowledge and experience or this information is insufficient, or in case the assessment of such information shows that the investment service or product offered or demanded is not appropriate for the client, must be clear and not misleading.
- Guideline 12 (Determining situations where the appropriateness assessment is required): Firms are required to adopt appropriate arrangements to ensure that they are able to determine situations where an appropriateness assessment needs to be performed and avoid performing one in situations where a suitability assessment needs to be performed.
- Guideline 13 (Controls): Firms are required to have appropriate monitoring arrangements and controls in place to ensure compliance with the appropriateness requirements.
Detailed guidelines are also set out in relation to the following:
" Information to clients about the purpose of the appropriateness assessment and about execution-only;
" Extent of information to be collected from clients (proportionality);
" Reliability of client information;
" Relying on up-to-date client information;
" Client information for legal entities or groups;
" Arrangements necessary to understand investment products;
" Arrangements necessary to assess the appropriateness of an investment or to issue a meaningful warning;
" Qualifications of firm staff; and
ESMA has stated that it will also undertake a review of the guidelines on suitability after the ongoing CSA on the application of those requirements has been completed.
The deadline for comments on the Consultation Paper is 29 April 2021. ESMA expects to publish the final report and guidelines in Q3 2021.
A link to the Consultation Paper can be found here.
Originally Published by Dillon Eustace, February 2021
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