5 Commonly Asked Questions About Suitability and Appropriateness

1. What is Suitability and Appropriateness?

When providing investment advice or portfolio management, a financial institution must obtain information about the client’s knowledge and experience in the investment field relevant to the specific type of financial instrument, investment product or service; their financial situation in their ability to bear losses and their investment objectives including their risk tolerance.

This is a key MiFID II requirement so that financial institutions only recommend investment services, financial instruments and investment-based products which are suitable for the client and in accordance with the client’s risk tolerance and ability to bear losses.

In simple terms, suitability checks ensure that investment advice and decisions to trade (including to buy or to hold) are suitable for the investor. Appropriateness checks relate to when a financial institution provides services without advice, such as execution-only services, ensuring that the financial instrument being offered is appropriate for the investor.

2. Why are Suitability and Appropriateness checks important?

These checks are essential in order to meet regulatory requirements and to protect both the financial institution and the clients. If done incorrectly, financial institutions may face significant fines for regulatory breaches or reversal of trades.

There is also a positive business case for Suitability and Appropriateness checks. Doing these checks correctly may open up additional opportunities and secure more business and revenue for the financial institutions.

3. Where does categorisation fit in with this?

Financial Institutions have an obligation to categorise clients correctly from the outset in order to know which products and services to sell to them.  If the categorisation is wrong, it has a huge impact on Suitability and Appropriateness checks, making the entire flow wrong. The assessment as to whether to enable the client to trade a particular financial product or service in a given country will also be wrong, leaving the financial institution at risk of mis-selling. It is important to get the information correct from the outset.

4. What type of categories are there?

In Europe, for example, there are three key categories: Retail Client, Elective Professional Client/Professional Client Per Se and Eligible Counterparty Opt-Up/ Eligible Counterparty Per Se. While Retail Clients have the highest level of protection and are the main category protected by the Financial Ombudsman, there are a number of reasons why financial institutions (and the clients themselves) may wish to push the client up the chain to the next category, for example, to access additional products or services.

 

Categorising clients correctly is highly complex – and for this reason, many financial institutions inadvertently get it wrong. As an example, many make the assumption that once they comply with MiFID, they comply with all EU markets in this regard. This is incorrect as the financial institution needs to defer to the status of the client’s domicile. If they aren’t aware, for example, of the specific guidelines for onboarding Slovakian clients, then they could easily and inadvertently breach the regulation, resulting in the need for a reversal of the transaction and/ or fines from the regulator.

5. Do clients have the right to complain if they believe they have been miscategorised?

Miscategorisation can have significant implications - if clients complain that they were not 'screened' correctly at the onboarding stage and should have been categorised as Retail Clients, not Elective Professionals, for example, they can be entitled to reversal of their trades and their funds back. Regulators cam impose significant fines on financial institutions for miscategorising clients. 

How can Muinmos help?

Muinmos’ innovative mPASS™ product provides financial institutions with a simple and fast way to ensure that Suitability and Appropriateness checks are done correctly at the onboarding stage – and that clients are categorised correctly and are offered the correct products and services throughout their lifecycle with the firm, even if regulatory guidelines subsequently change.

mPASS™ provides full product and services cross border clearances, with instant Suitability and Appropriateness checks.

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