What is the Suitable and Appropriate Weight of a Boardgame?

Suitability and appropriateness doesn’t apply just to buying financial products. Let’s take boardgames as an example.

If you’re a boardgame enthusiast like me, you probably know boardgamegeek.com. And you probably spend quite a lot of time there. Especially before buying a new boardgame online.

My favourite part of the website is the rankings. Not the “Best 100 Boardgames” ranking or anything like that. Oh no – it’s the ‘weight’ ranking.

What’s a ‘weight’ ranking, you ask, and what does is have to do with suitability and appropriateness? Well, according to BGG (that’s how us board-gamers call boardgamesgeek.com), it’s a ‘complexity’ rating. “A community rating for how difficult a game is to understand.”

I myself tend to look for games which have a ‘weight’ of 3 or under. “Monopoly”, just to give you an idea, has a weight of 1.64 out of a possible 5; “Risk” is weighted at 2.08; “The Settlers of Catan” at 2.32; whereas “The Campaign for North Africa: The Desert War 1940-43”, the weightiest game on BGG, scores a whopping 4.72. 

The reason I look for games ‘weighing’ 3 or less is that I play mostly with my son; and kids his age have a hard time grasping overly complex games. So I have to make sure I buy games that are suitable and appropriate for him.

Now, I know my son very well. I’ve been raising him, as a person and, perhaps more importantly in this respect, as a board-gamer, for quite some years now. I also have the collective wisdom of the boardgames community on my side, reflected in a single, easy to understand complexity index.

Investment firms, however, don’t have it that easy. They have to assess the suitability and appropriateness of complex financial products and services to clients they basically don’t know, and very often haven’t even met. And if they get the classification wrong, they might lose all the profits from that specific investor, get fined, hurt their reputation, even lose their license.

And what makes it even more difficult is that the suitability and appropriateness rules and application are different in every jurisdiction. Even in the EU – where MiFID II is supposed to create uniformity in all matters regarding suitability and appropriateness – there is quite a lot of inconsistency in the way member states implement and enforce MiFID II classification and suitability and appropriateness rules.

Just recently, on July 21st 2021, ESMA published the “results of a Common Supervisory Action (CSA) on MiFID II suitability requirements.” We’ll get to that in a bit; but first, just a quick recap of some MiFID II suitability and appropriateness basics.

MiFID II Suitability and Appropriateness 101

Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments, or, as it is better known, “MiFID II”, saw the light of internet on March 15, 2014.

Article 24 of MiFID II, titled “Assessment of suitability and appropriateness and reporting to clients”, talks about two kinds of services:

(1)    Investment advice or portfolio management;

(2)    Other services (commonly referred to as “execution only”).

When giving investment advice or portfolio management services, says article 24, the investment firm needs to obtain information about:

(1)    knowledge and experience in the relevant investment field;

(2)    financial situation including ability to bear losses;

(3)    investment objectives including risk tolerance.

Why? In order to “recommend to the client or potential client the investment services and financial instruments that are suitable for him and, in particular, are in accordance with his risk tolerance and ability to bear losses”. This is called a “MiFID II suitability assessment”.

When giving other investment services, namely “execution only” services, the investment firm is only required to obtain information about the investor’s knowledge and experience in the relevant investment field. This is to “assess whether the investment service or product envisaged is appropriate for the client.” This is known as a “MiFID II appropriateness assessment.”

Now, this is of course far from being an exhaustive depiction of the MiFID II suitability and appropriateness regime. You can find a much more exhaustive depiction in ESMA’s guidelines on suitability here or on appropriateness in ESMA’s consultation here. Otherwise, you can revert to our own FAQ on the matter here.

In this blog post we’ll say just, that there are several exceptions to the above mentioned rules. For example, article 25(4) of MiFID II sets out a very specific set of circumstances, in which an investment firm does not need to carry out an appropriateness assessment (namely in the case of an execution only service, in regard to certain non-complex financial instruments, carried out at the initiative of the client, which is informed that an appropriateness assessment is not required).

Other exceptions are set in the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016, commonly known as the MiFID II Delegated Regulation (MiFID II, just to explain, is a directive, meaning a kind of EU legislation that leaves each member state discretion as to how to achieve the result stipulated by MiFID II). MiFID II Delegated Regulation is, as its name suggests, a regulation, which is another kind of EU legislation – which is directly applicable in the member states, and needs not be transposed into national legislation). Article 54(3) of the MiFID II Delegated Regulation states that investment firms are entitled to assume that:

(1)    professional clients, including opt-ups (meaning, retail clients who have opted to be treated like professional clients) have enough knowledge and experience (article 54(3));

(2)    professional clients per-se (meaning, not opt-ups) are financially able to bear the risks consistent with their investment objectives (article 54(3)).

Are MiFID II Suitability and Appropriateness Rules Suitable and Appropriate?

So, MiFID II – the directive and delegated regulation alike – set the framework for assessing suitability and appropriateness. MiFID II also uses another term – compatibility – stating, in article 24, that “an investment firm shall understand the financial instruments they offer or recommend, assess the compatibility of the financial instruments with the needs of the clients to whom it provides investment services…

But here’s the rub: MiFID II creates a scale of clients – retail, professional, eligible counterparties – but it doesn’t create a scale of financial services / products (or, as we boardgamers call it, a complexity scale, or “weight”).

True, MiFID II Delegated Regulation does distinguish, in article 57, between complex and non-complex instruments, and there are several places MiFID II points out various products in that respect, but that’s about it.

MiFID II also does not set a clear risk-profiling standard, for clients nor instruments.

Basically, MiFID II says: “there are three categories of clients, and you have to make sure you sell them the suitable and appropriate financial services / products”; but it doesn’t give a clear standard for the evaluation / ranking of the complexity of the said financial services / products.

In many ways, it seems MiFID II only went halfway: it created one categorisation, a client categorisation, that is supposed to have a consequence as to the categories of financial products or services the financial institution is allowed to offer the client; but MiFID II didn’t create that second categorisation, meaning, the categorisation of financial products / services.

Sure, creating such categories / clusters of financial services or products might not be very simple as having retail, professional opt-ups, professional per-se and eligible counterparties ; but aren’t investment firms basically required to do so? If so, from a regulation standpoint, why not pre-classify the products / services? If the purpose of suitability and appropriateness is to create a fit between the clients and the products / services, why only categorise one side of the equation, the clients’ side, and not the other?

There are, I’m sure, very good reasons for not doing that, and I’m not lobbying for more regulation. All I’m saying is, that it seems that the legal terms used are perhaps too broad to achieve specificity; and in the lack of specificity, well, there is inconsistency.

Which brings us right back to the next chapter, which is ESMA’s recent report on its “Common Supervisory Action (CSA) on MiFID II suitability requirements”.

ESMA’s Report on MiFID II Suitability Requirements

In February 2020 ESMA launched a “Common Supervisory Action” (CSA), meaning, a supervisory action taken by a large number of the financial regulators in Europe. The purpose of this action was to “allow ESMA and the NCAs to assess the progress made by intermediaries in the application of this key requirement” (the requirement being performing an adequate suitability assessment).

The report, by the way, completely ignores the legal concepts of compatibility and appropriateness mentioned above, though it deals with them directly, a fact that makes the report itself, well, inconsistent with MiFID II…

Anyhow, the supervisory action itself was, so it seems, quite comprehensive. It involved 26 national regulators, 206 firms, and involved, amongst others, reviewing concrete suitability assessments and recorded phone conversations with investors.

The main finding of the supervisory action was, according to ESMA that there is “an adequate level of firms’ compliance with key elements of the suitability requirements that were already regulated under MiFID I such as firms’ understanding of products and clients and the processes and procedures to ensure the suitability of investments. However, shortcomings and areas of improvement have emerged with regard to some of the new requirements introduced by MiFID II, notably the requirement to consider the cost and complexity of equivalent products, the costs and benefits of switching investments and suitability reports”.

However, I read the report very differently. Across the findings, the words “vary”, in its different, well, variations, like “varies” and “varying”, kept on showing up. “Practices may vary…” “Firms rely on a variety of mechanisms…” “The frequency of updates vary greatly…” “To varying degrees…

Other phrases of similar meaning were also frequent in the report: “In a few jurisdictions…” “Some firms…” “A number of NCAs…” “The extent of such involvement is very disparate across both Member States and firms…” “Firms’ policies and procedures differ greatly in quality and comprehensiveness…

And after reading this report I couldn’t help but wonder – in a highly elaborate market such as capital markets; in a rich continent like Europe; in relation to a seven-year-old piece of legislation (which in itself is an amendment of MiFID I, that saw light as early as 2007!); in regard to a highly important part of that legislation – there is no uniformity. Could it simply be that MiFID II’s suitability and appropriateness requirements are drafted too broadly?

Isn’t this just the result of a too-broad legislative approach, refraining from defining key-notions, a possibility we pointed at in our discussion above about the existence of categorisation on the client side of the equation but not on the products / services side of it?

I, of course, don’t have definitive answers. I can only say, that I would definitely like to see an official complexity rating for financial products or services, or at least a categorisation that matches the client one. And yes, the KIDs – the Key information Documents product manufacturers are required by PRIIPS to prepare – go a certain way towards helping the client understand the nature of the product; but they still don’t provide a clear, simple categorisation.

Of course, I might be wrong, and the creation of such rating or categories would impede upon the liberties of investors and financial institutions to an unreasonable extent. It’s a discussion I would love having, but at a different time. Right now, I’m going to play a boardgame with my son. No, not “Monopoly”. And not “MiFID II – The Struggle for Suitability and Appropriateness” (though someone should definitely develop this one!). 7 Wonders Duel. Try it, it’s a great game. The highest ranked game in BGG with a weight of under 2.5, in fact, and that says a lot.