Suitability and Appropriateness Assessment on Product Governance
It is evident that the product governance requirements prior to distribution are interrelated with a -diligent- suitability or appropriateness assessment, under the MiFID II requirements. Distributors have the ultimate responsibility and obligation to identify the target market of the investment products prior to distribution, while they must ensure that the products are suitable to the needs, characteristics, and objectives of the end clients.
Carrying on from our previous article ‘The Enhanced Product Governance under MiFID II’, in this commentary, we aim to provide more clarity on what information is required for the firms to conduct adequate suitability or appropriateness assessment, prior to the onboarding of the client and of the product distribution.
Investment firms are required to obtain the below necessary information in order to understand clients’ investment profile and their risk tolerance. The firm must ensure to gather this information in regards to clients’
– knowledge on the specific type of products,
– personal experience and exposure to the proposed investment products,
– financial profile,
– risk tolerance and ability to bear losses.
In cases where firms provide investment advice and/or portfolio management and the assessment of suitability reveals that the clients’ profile is not suitable to be offered an investment product, then the firm must not recommend the specific investment product. In all other investment services and in cases where the appropriateness assessment process reveals that the investment products are not compatible to the client, the firm is required to provide the client with a warning notice that these products are not recommended for investment. The firm is required to provide ways for the client to understand the investment products and acquire knowledge in regards to the products about to invest. Nevertheless, the responsibility to proceed with the investment lies with the client.
It is worth noting that investment firms are not required to obtain information of appropriateness (excluding, firms providing investment advice and/or portfolio management) if they offer services in the below financial instruments;
– bonds, shares or other forms of securitized debt admitted to trading on a regulated market or on an MTF,
– money-market instruments (excluding instruments embed a derivative),
– non-complex financial instruments, and
– any product which is not difficult for the client to understand the risks involved.
In the subsequent article, we will elaborate on;
– how investment firms shall categorize their clients, and
– how investment firms ensure to achieve investor protection.
Please feel free to contact us at email@example.com if you have any questions.
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.