ESMA publishes final report on MiFID II suitability requirements
29 May 2018 Paris
Image: Shutterstock
The European Securities and Markets Authority (ESMA) has published its final report on guidelines on the second Markets in Financial Instruments Directive (MiFID II) suitability requirements.
According to ESMA, the guidelines will make sure that the objectives of MiFID II can be efficiently achieved. ESMA stated that the implementation of these guidelines should strengthen investor protection—a key objective for ESMA.
ESMA said: “These guidelines aim to ensure a common, uniform and consistent implementation of the MiFID II requirements related to the assessment of suitability by providing explanations, clarifications and examples on how the relevant obligations related to the assessment of suitability should be fulfilled.”
The paper summarises and analyses the responses to the consultation paper and explains how the responses have been taken into account.
The guidelines in the final report, build on the text of ESMA’s 2012 MiFID I guidelines on suitability, consider recent technological developments of the advisory market—including the increasing use of automated or semi-automated systems for the provision of investment advice or portfolio management.
It also take into account the results of supervisory activities conducted by national competent authorities (NCAs) on the implementation of the suitability requirements and they also incorporate the outcome of studies in the area of behavioural finance.
Under the MiFID I framework, Article 35 of the MIFID Implementing Directive three required firms to obtain the necessary information to understand the essential facts about the client, and to have a reasonable basis for believing, given due consideration of the nature and extent of the service provided.
ESMA ask respondents to answer whether they agreed with the suitability assessment and specifically with the new supporting guidelines on robo-advice.
ESMA said: “Respondents welcomed the approach that ESMA adopted when updating the existing guidelines and appreciated the fact that behavioural insights have been taken into account in the area of how the information should be presented to clients in order to avoid perceptive or cognitive distortions from impairing investors’ answers, especially in relation to the provision of robo-advice.”
It added: “Some respondents noted that the recommendation to firms to ascertain clients’ understanding of risks and the relationship between risk and return of a specific investment by asking questions—provided under paragraph 17 of the draft guidelines—seems to go beyond MiFID II requirements.”
ESMA also asked respondents if they thought further guidance is needed to clarify how firms should assess clients’ ability to bear losses and if they agreed with ESMA’s suggested approach on the arrangements necessary to understand investment products for the purposes of suitability assessment.
They further enquired, “Do you agree with the suggested approach for conducting a cost-benefit analysis of switching investments in the context of portfolio management or investment advice?”.
ESMA stated the guidelines, written after summarising and analysing the responses to the consultation paper, will ensure that MiFID II’s objectives are achieved.
The guidelines were published just as the European Commission published its ‘Action Plan’ on sustainable finance.
In the action plan, the European Commission stated: “Firms should ask about their clients' preferences (such as environmental, social and governance factors) and take them into account when assessing the range of financial instruments and insurance products to be recommended.”
Commenting on the action plan, ESMA said: “We have included, pending changes to the legal framework, a good practice for firms addressing this issue. The good practice will contribute to raising firms’ and supervisors’ attention and awareness of this issue.”
It added: “ESMA will monitor the legislative proposals under the European Commission action plan and will consider making focused amendments to the guidelines to reflect changes to the MIFID II delegated acts on the topic of sustainability.”
According to ESMA, the guidelines will make sure that the objectives of MiFID II can be efficiently achieved. ESMA stated that the implementation of these guidelines should strengthen investor protection—a key objective for ESMA.
ESMA said: “These guidelines aim to ensure a common, uniform and consistent implementation of the MiFID II requirements related to the assessment of suitability by providing explanations, clarifications and examples on how the relevant obligations related to the assessment of suitability should be fulfilled.”
The paper summarises and analyses the responses to the consultation paper and explains how the responses have been taken into account.
The guidelines in the final report, build on the text of ESMA’s 2012 MiFID I guidelines on suitability, consider recent technological developments of the advisory market—including the increasing use of automated or semi-automated systems for the provision of investment advice or portfolio management.
It also take into account the results of supervisory activities conducted by national competent authorities (NCAs) on the implementation of the suitability requirements and they also incorporate the outcome of studies in the area of behavioural finance.
Under the MiFID I framework, Article 35 of the MIFID Implementing Directive three required firms to obtain the necessary information to understand the essential facts about the client, and to have a reasonable basis for believing, given due consideration of the nature and extent of the service provided.
ESMA ask respondents to answer whether they agreed with the suitability assessment and specifically with the new supporting guidelines on robo-advice.
ESMA said: “Respondents welcomed the approach that ESMA adopted when updating the existing guidelines and appreciated the fact that behavioural insights have been taken into account in the area of how the information should be presented to clients in order to avoid perceptive or cognitive distortions from impairing investors’ answers, especially in relation to the provision of robo-advice.”
It added: “Some respondents noted that the recommendation to firms to ascertain clients’ understanding of risks and the relationship between risk and return of a specific investment by asking questions—provided under paragraph 17 of the draft guidelines—seems to go beyond MiFID II requirements.”
ESMA also asked respondents if they thought further guidance is needed to clarify how firms should assess clients’ ability to bear losses and if they agreed with ESMA’s suggested approach on the arrangements necessary to understand investment products for the purposes of suitability assessment.
They further enquired, “Do you agree with the suggested approach for conducting a cost-benefit analysis of switching investments in the context of portfolio management or investment advice?”.
ESMA stated the guidelines, written after summarising and analysing the responses to the consultation paper, will ensure that MiFID II’s objectives are achieved.
The guidelines were published just as the European Commission published its ‘Action Plan’ on sustainable finance.
In the action plan, the European Commission stated: “Firms should ask about their clients' preferences (such as environmental, social and governance factors) and take them into account when assessing the range of financial instruments and insurance products to be recommended.”
Commenting on the action plan, ESMA said: “We have included, pending changes to the legal framework, a good practice for firms addressing this issue. The good practice will contribute to raising firms’ and supervisors’ attention and awareness of this issue.”
It added: “ESMA will monitor the legislative proposals under the European Commission action plan and will consider making focused amendments to the guidelines to reflect changes to the MIFID II delegated acts on the topic of sustainability.”
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