Regulation  

Suitability and the advice process under Mifid II

This article is part of
Guide to Mifid II implementation

Suitability and the advice process under Mifid II

Even before the Markets in Financial Instruments Directive I had been firmly established, policy makers were drawing up plans for phase two to improve investor protections across member states.

This was enhanced when the financial crisis hit in 2007-2008, putting the need for greater transparency and protections in place. 

As the Financial Conduct Authority (FCA), the body responsible for implementing Mifid II in the UK, has claimed, it will “strengthen investor protection”.

“In the words of the FCA”, says Richard Romer-Lee, managing director of Square Mile Investment Consulting and Research, “Mifid II aims to strengthen investor protection, reduce the risk of disorderly markets, reduce systemic risks and increase the efficiency of financial markets, and reduce unnecessary costs.”

According to Linda Gibson, director of regulatory change and compliance risk for BNY Mellon’s Pershing, the new suitability requirements under Mifid II revolve “around investor protection and ensuring that investment firms act in their clients’ best interests”.

This is a big question for advisers. According to David Ogden, compliance manager for Seven Investment Management, one of the most common questions being asked by advisers on Mifid II is: 'Suitability reviews must be conducted annually. How will that work in practice?'

But in essence, says Susann Altkemper, counsel for City law firm CMS, Mifid II does not “fundamentally” change the requirements relating to suitability.

What it does do, however is “impose a new obligation on investment advisers to provide suitability reports to retail clients before any transaction is concluded.

Ms Altkemper comments: “In practice, this might be difficult to achieve, and unless advisers can rely on a narrowly drafted exception, they will need to adjust their processes or consider changes to business models altogether.”

She points out that suitability reports are required where the advice does not lead to a transaction, or where the advice is not to buy or sell a financial instrument.

The implication is that where there is no trade or transaction, advisers may have not kept detailed documentation on such advice beforehand. This all changes under Mifid II.

Those firms already keeping extensive and detailed file notes will “not find it overly burdensome to produce Mifid II-compliant suitability reports,” says Ms Altkemper.

However, she warns: “Other firms will need to assess carefully whether they obtain all client information necessary to deliver Mifid-II suitability reports, and they may need to increase existing resources to undertake suitability assessments and record output in a fully compliant manner.”

Definitions

The incoming second wave of the directive will also clear up the definition of what is considered investment advice, and what sort of instruments will fall under that definition, as well as capturing in its scope advisory services operating through electronic or automated systems. The full range of official European Union documents relating to Mifid II can be found online