Episode 9 - MiFID II - Suitability and Appropriateness

MiFID II comes into effect on 3rd Jan 2018. These regulations go beyond risk tolerance but our interest focuses on the points of suitability and appropriateness.

The European Securities and Markets Authority (ESMA) introduced MiFID in 2007 to sufficiently facilitate cross-border investment services in Europe. These regulations have been updated in the form of MiFID II which will come into effect on 3rd Jan 2018. These regulations go beyond risk tolerance but our interest focuses on the points of suitability and appropriateness.

Suitability

As a requirement of the regulation, an advisor/platform must conduct an assessment to obtain information relevant to ascertaining which type of investment would be most suitable. The assessment has three stages:

Knowledge and Experience

covers the investor’s familiarity with types of service, transactions and regulated investments.  Also, the frequency that the investor may have performed these types of investments and the level of education or professional work experience the investor may have.

Financial situation

This is generally used as a knock-out stage, determining whether the investor can bear losing the investment without adversely affecting their current lifestyle. The advisor needs to consider the investor’s regular income, assets including investments, liquid assets and property. Regular financial commitments should also be considered.

Objectives

At this point the advisor discovers the client’s investment time horizon and purpose of the investment. The investor’s risk profile and risk tolerance must also be assessed.

Appropriateness

Should the investor be considered a professional, the advisor/platform will run an appropriateness assessment which consists of the Knowledge and Experience step and excludes questions on their financial situation and investment objectives.

Another requirement as part of MiFID II is to keep a record of your investor’s suitability and investment appropriateness assessments.

Under the new legislation, you are also required to run this assessment every time your investor wants to make an investment. By keeping records of the assessments, you will be able to see that over time, their risk preference will change, influencing the type of options that are suitable.

Another very interesting development is MiFID II will also apply to robo-advisors. Under current legislation, they are exempt from MiFID but this is set to change. The updated regulations will apply to any firm providing investment advice or recommendations, regardless of the utilized technology.

Fortunately, the ORR Online platform already covers all of these points. We encourage our existing clients to talk to us about the calibration of their RTQ to ensure they remain compliant. If you are not one of our clients, we would be very interested in talking to you to and help ensure you will be compliant come Jan 3rd 2018.