Central Bank review finds firms providing investment services need to improve suitability assessments

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UPDATE 22/04/2022: If below below on suitability requirements is of interest, then you should also look at our post of 22 April 2022 on the Central Bank's review findings on issues in marketing of complex investment products.

Central Bank review finds firms providing investment services need to improve suitability assessments

• Review examined firms’ compliance with the suitability requirements under MiFID II
• Review finds areas for improvement and firms need to adopt a more client-focused approach
• Firms required by the Central Bank to review their processes and put action plan in place for improvements

The Central Bank of Ireland has published a Dear CEO letter outlining the findings of a review of investment firms’ compliance with the suitability requirements under MiFID II. The review was conducted as part of a Common Supervisory Action (CSA) coordinated by the European Securities and Markets Authority (ESMA).
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The purpose of the review was to assess firms’ compliance with the suitability requirements under MiFID II by simultaneously conducting supervisory activities throughout the EU/EEA. The findings, which are highlighted in ESMA’s recent public statement, incorporate the findings from the Central Bank’s own supervisory analysis, and engagement with other National Competent Authorities (NCAs).
When providing investment advice and/or portfolio management, Firms are required to take all reasonable steps to ensure that a client’s investments align to their objectives and personal circumstances. This is a key measure to protect investors from the risk of purchasing unsuitable products.

The review identified evidence of positive practices, particularly where firms took a personalised and comprehensive approach to suitability assessments for their clients. However, it also identified instances where further action is required by firms. For example:

• Firms need to take a more client focused approach, using tailored suitability assessments specific to their businesses and the needs and circumstances of their clients.
• Firms must improve their assessment of clients’ knowledge and experience, financial situation and investment objectives, particularly information relating to clients’ financial situation and their capacity to withstand losses.
• Firms must ensure suitability reports are sufficiently detailed and personalised to clients’ objectives and individual circumstances.
• There is particular concern at the quality of firms’ oversight of cases where a client insists on proceeding with the transaction at their own initiative against the firm’s suitability advice. In such a case, clients should be clearly informed that the transaction is not considered by the firm to be suitable, including a clear explanation of the potential risks involved if the client proceeds.

The Central Bank will continue to engage with firms where specific supervisory actions have been imposed, which require firms to take specific action on foot of our findings.
In addition, the Central Bank is requiring all Irish authorised MiFID firms and credit institutions, who provide portfolio management and advisory services to retail clients, to conduct a thorough review of their individual sales practices and suitability arrangements. This review must be documented and must include details of actions taken to address findings in the ESMA public statement and this letter. This review should be completed, and an action plan discussed and approved by the board of each firm, by end of Q1 2022.

Director of Consumer Protection, Colm Kincaid, said: “Investing in an unsuitable investment product can lead to unexpected losses, which can have devastating consequences for individual investors and their families. Regulated firms play a key role in protecting consumers against this risk.

“However, the findings from this review show that regulated firms need to improve their performance when it comes to assessing the suitability of investment products they recommend or advise consumers to purchase. These assessments must be of high quality, based on a good understanding of the customer’s circumstances and capacity for financial loss, and properly documented.”

Source: Central Bank of Ireland, 01 December 2021