Suitability: Draft Guidelines

‘Suitability’ can be found in COBS 9 of the FSA Handbook and is largely, although not exclusively, driven by MiFID requirements. As a reminder, the concept of suitability applies to a firm when making a personal recommendation or when managing investments and applies in respect of both retail and professional clients – albeit that certain assumptions can be made in respect of the latter (see COBS 9.2.8). As mentioned in previous Regulatory Roundups – e.g. issues 31 & 28 – the FSA has taken a great interest in “assessing suitability” with certain firms finding that they are subject to ongoing regulatory action.

A recent consultation paper (CP) issued by ESMA suggests that this is not simply a UK/FSA issue but rather that full and effective compliance with MiFID suitability requirements are not as consistent or as wide-spread across EEA member states as it could or should be. Areas of weakness noted include failing to collect the necessary information and failing to correctly interpret what information has been provided; overlooking the client’s education level; effectively letting the client decide on the suitability of an investment; and poor record keeping. (Please note, it appears that links to the ESMA website do not open on some web platforms. If you cannot access the document using the link please copy and paste the following address into your web browser: http://www.esma.europa.eu/system/files/2011_445.pdf).

The purpose of the CP is not to introduce new rules but rather to set out guidelines “to enhance clarity and foster convergence in the implementation of certain aspects of the MiFID suitability requirements”.

The guidelines include, but are not limited to, ensuring that the client actually understands the questions being asked; not relying unduly on the client’s own assessment of knowledge and experience (so presumably not simply asking the client to tick a box that best meets their needs etc.); and explaining to the client why certain questions are being asked and the importance of accurate and sufficient information.

The draft guidelines do not contain any radical proposals and probably many firms will already be following a similar approach. However with suitability being an FSA focus, firms should consider reviewing the (draft) guidelines in the light of their own business processes in order to identify – and if necessary remedy – any potential gaps. The consultation paper is fairly short (26 pages) and those firms that want to cut to the chase can go to section V on page 19. The consultation period ends 24 February. ESMA expects to publish its final report, and final guidelines, in Q2 2012.