The European Securities and Markets Authority’s (ESMA) guidelines on the suitability assessment clarify the obligations imposed by the MiFID II Directive regarding the suitability assessment in connection with investment advice and portfolio management. For most investment firms, the guidelines mean changes to customer data forms and service platforms. Therefore, the implementation of the guidelines should be seen as a part of development of the customer service process.

The guidelines clarify ways of operating regarding the assessment of a client’s knowledge, experience, ability to bear losses and risk tolerance, and the use of this information in the suitability assessment. The data collected should be reviewed as a whole and thus remain aware of relevant conflicts in the information collected from the customer.

Clients must have an adequate understanding of risks

Clients can update their information so that a product or service unsuitable to them would appear to be suitable, even though there may not have been an actual change in the client’s situation. These kinds of situations must be identified. The client must always have a sufficient understanding of the risk/return relationship, the investment duration, and the impact of costs on profit.

Cost transparency

Costs arising from switching investments must be clarified, because the costs and benefits must be taken into consideration in the suitability assessment. For example, tax consequences arising from switching investments could be assessed in the cost-benefit analyses due to the change in investments. The guidelines have also clarified procedures how to conduct a suitability assessment for a legal person, or in situations in which the client is represented by one or more natural persons.

Factors of particular consideration in robo-advice services

The provision of investment advice and portfolio management can be offered also through highly automated IT systems. In the guidelines, robo-advice services refer to services provided through completely or semi-automated systems with minimal communication between the client and the company’s staff. The importance of the guidelines is emphasized especially when it comes to robo-advice services, because the suitability assessment must be consistent also when performed with automated tools regardless of the minimal personal communication. Likewise, when using automated tools, it must be ensured that the staff using them are competent with the technology and algorithms used to provide, understand and assess the digital advice.

There is no ready one-size-fits-all solution in the adoption of the guidelines; it is worthwhile to review each firm’s operations, the investment products and services it offers and their complexity, risks and clientele. Thus implementation of the guidelines requires the renewal of instructions, customer materials and practices in the firm – work that we have already started with many of our clients.

Further information:

Katja Flittner, Associate, tel. +358 50 410 0512, [email protected]