Central Bank Review Finds Firms Providing Investment Services Need To Improve Suitability Assessments

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Central Bank Review Finds Firms Providing Investment Services Need To Improve Suitability Assessments

01 December 2021Press release

  • The review examined the companies’ compliance with the suitability requirements under MiFID II

  • Review reveals areas for improvement and companies need to take a more customer-centric approach

  • Companies are required by the Central Bank to review their processes and put in place an action plan for improvements

The Central Bank of Ireland has issued a Dear CEO letter outlining the findings of a review of investment firms’ compliance with the suitability requirements under MiFID II. The review was carried out as part of a Joint Supervisory Action (CSA) coordinated by the European Securities and Markets Authority (ESMA).

The objective of the review was to assess companies’ compliance with MiFID II adequacy requirements by simultaneously carrying out surveillance activities across the EU / EEA. The findings, which are highlighted in ESMA’s recent public statement, incorporate findings from the Central Bank’s own prudential analysis and engagement with other National Competent Authorities (NCAs).

When providing investment advice and / or portfolio management, companies are required to take all reasonable steps to ensure that a client’s investments match their goals 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 when companies took a personalized and holistic approach to suitability assessments for their clients. However, he also identified cases where additional measures are required by companies. For example:

  • Businesses need to take a more customer-centric approach, using suitability assessments tailored to their business and the needs and circumstances of their customers.

  • Companies need to improve their appreciation of their clients ‘knowledge and experience, their financial situation and their investment objectives, including information about clients’ financial condition and their ability to bear losses.

  • Companies should ensure that adequacy reports are sufficiently detailed and tailored to the goals and individual circumstances of clients.

  • Of particular concern is the quality of supervision by firms over instances where a client insists on proceeding with the transaction on their own initiative against the firm’s adequacy opinion. In such a case, clients should be clearly informed that the transaction is not considered by the firm to be appropriate, including a clear explanation of the potential risks involved if the client proceeds.

The Central Bank will continue to engage with companies where specific supervisory measures have been imposed, forcing companies to take specific action based on our findings.

In addition, the Central Bank requires all Irish companies and credit institutions approved by MiFID, which provide portfolio management and advisory services to retail clients, to conduct a thorough review of their individual sales practices and adequacy agreements. This review should be documented and should include details of actions taken to respond to the findings of ESMA’s public statement and this letter. This review should be completed, and an action plan discussed and approved by the board of directors of each cabinet, by the end of the first quarter of 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 businesses play a key role in protecting consumers against this risk.

“However, the findings of this review show that regulated firms need to improve their performance when it comes to assessing the suitability of the investment products they recommend or advise consumers to buy. of high quality, based on a good understanding of the situation and the ability of the client to sustain financial losses, and properly documented. ”

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