MiFID Supervisory Briefing Appropriateness and execution-only

Transcription

1 MiFID Supervisry Briefing Apprpriateness and executin-nly 19 December 2012 ESMA/2012/851

2 Date: 19 December 2012 ESMA/2012/851 I. Backgrund 1. ESMA is required t play an active rle in building a cmmn supervisry culture by prmting cmmn supervisry appraches and practices. 2. This supervisry briefing has been designed fr supervisrs as an accessible intrductin t the Markets in Financial Instruments Directive (MiFID) 1 apprpriateness rules, and as a useful starting pint when deciding n areas f supervisry fcus. It summarises the key elements f the rules and explains the assciated bjectives and utcmes. It als includes indicative questins that supervisrs culd ask themselves, r a firm, when assessing firms appraches t the applicatin f the Mi- FID rules. 3. The cntent f this briefing is nt exhaustive, des nt cnstitute new plicy, and des nt prmte any particular way f supervising the rules. It has been designed t be used in the way that best fits with supervisrs methdlgies (whether distributing the briefings internally, r passing them t external bdies, such as auditrs, fr example). II. Scpe 4. This supervisry briefing explains the MiFID apprpriateness test and is aimed at cmpetent authrities (as defined in MiFID). It is als meant t give market participants indicatins f cmpliant implementatin and applicatin f the relevant MiFID prvisins. 5. It takes accunt f related CESR wrk 2 and the Eurpean Cmmissin s database f MiFID Questins and Answers. 6. It applies in relatin t the applicatin f the fllwing MiFID prvisins: Articles 19(5) and (6) f MiFID (2004/39/EC). Articles f the MiFID Implementing Directive (2006/73/EC). 3 III. Status f this dcument 7. This dcument is issued in terms f Article 29 f the ESMA Regulatin. 4 1 Directive 2004/39/EC f the Eurpean Parliament and f the Cuncil f 21 April In Nvember 2009, CESR published the cnclusins f its cnsultatin exercise n the distinctin between cmplex and nncmplex financial instruments fr the purpse f the MiFID apprpriateness test - including an indicative list f hw cmmnly traded instruments shuld (in CESR s view) be treated. The relevant dcuments are and 3 Cmmissin Directive 2006/73/EC f 10 August 2006 implementing Directive 2004/39/EC f the Eurpean Parliament and f the Cuncil. ESMA CS rue de Grenelle Paris Cedex 07 France Tel. +33 (0)

3 IV. Briefing IV.I. Apprpriateness 8. The current MiFID apprpriateness requirements are set ut in Articles 19(5) and (6) f MiFID (2004/39/EC) and in Articles f the MiFID Implementing Directive (2006/73/EC). Article 19(6) f MiFID and Article 38 f the MiFID Implementing Directive cver the executin-nly element f the apprpriateness regime. The aim f the requirements is t increase investr prtectin in respect f nn-advised services. 9. The way in which the requirements apply depends n the type f service in questin, the type f MiFID financial instrument invlved (in particular, whether the prduct is cmplex r nncmplex ), and the type f client. 10. They apply t firms which prvide MiFID investment services ther than investment advice r prtfli management (in thse cases, the bligatin is t assess suitability). Therefre, they apply t firms when perfrming nn-advised services such as receiving r transmitting rders, executing rders n behalf f clients, dealing n wn accunt, underwriting, and placing. 11. The requirements d nt apply t eligible cunterparties. In additin, firms may assume that a prfessinal client has the necessary knwledge and experience t understand the risks invlved relating t the specific prduct r service fr which they are classified as prfessinal. 12. Where the apprpriateness test applies, it requires an investment firm t seek infrmatin frm a client r ptential client abut his knwledge and experience (i.e. ability) t understand the risks abut a specific type f prduct r service. This is t enable the firm t determine whether that prduct r service is apprpriate fr the client. (Unlike the requirements fr suitability, there are n specific requirements t assess the client s financial situatin r investment bjectives). IV.II. Executin-nly business 13. In MiFID Article 19(6) (tgether with Article 38 f the MiFID Implementing Directive), there is an exemptin frm the apprpriateness test fr certain types f executin-nly business. Hwever, this is currently nly available if all f the fllwing cnditins are met: a. the service cnsists nly f the executin and/r the receptin and transmissin f rders invlving shares admitted t trading n a regulated market r in an equivalent third cuntry market, mney market instruments, bnds r ther frms f securitised debt (excluding thse bnds r ther securitised debt that embed a derivative), UCITS and ther nncmplex financial instruments; and b. the service is prvided at the initiative f the client r ptential client ; and c. the client r ptential client has been clearly infrmed that in the prvisin f this service the investment firm is nt required t assess the suitability f the financial instrument r 4 Regulatin (EU) N 1095/2010 f the Eurpean Parliament and f the Cuncil f 24 Nvember 2010 establishing a Eurpean Supervisry Authrity (Eurpean Securities and Markets Authrity), amending Decisin N 716/2009/EC and repealing Cmmissin Decisin 2009/77/EC. 3

4 service prvided r ffered, and that therefre the client des nt benefit frm the crrespnding prtectin f the relevant cnduct f business rules; and d. the investment firm cmplies with its bligatins under Article 18 f MiFID (cnflicts f interest). 14. Recital 30 f MiFID states that a service shuld be cnsidered t be prvided at the initiative f a client unless the client demands it in respnse t a persnalised cmmunicatin frm r n behalf f the firm t that particular client, which cntains an invitatin r is intended t influence the client in respect f a specific financial instrument r specific transactin. A service can be cnsidered t be prvided at the initiative f the client ntwithstanding that the client demands it n the basis f any cmmunicatin cntaining a prmtin r ffer f financial instruments made by any means that by its very nature is general and addressed t the public r a larger grup r categry f clients r ptential clients. 15. Cmmunicatins that are by their very nature general will lead t services that are at the initiative f the client. If the ther cnditins fr prviding executin nly business described abve are met, thse services will nt trigger an apprpriateness test. General cmmunicatins culd include, fr example, material in newspapers and magazines r n TV, radi r billbards. Other cmmunicatin methds (such as websites and internet search results) might als fall int this categry, but nly if they are by their very nature general, which may depend n the individual circumstances. 16. Therefre, firms are likely t need prcesses (i) t distinguish between cmplex and nn-cmplex prducts (which may already have been dne at the prduct design stage); (ii) t identify whether cntact with the client is at the initiative f the firm; and (iii) t ensure that necessary warnings have been prvided. Questins n general implementatin What prcess has the firm established fr assessing apprpriateness? Hw have staff been trained in the prcess? Hw has the firm ensured that it is clear abut the services it is ffering and whether these are advised r nt? Hw des it cmmunicate this clearly t its staff and ther representatives? Hw des it ensure that clients understand whether services being ffered are advised r nt? What measures and cntrls has it adpted t decide whether the services ffered by its emplyees are advised r nt? If a firm chses nt t test apprpriateness fr all nn-advised transactins and t use the exemptin available in Article 19(6): What plicies and prcesses has the firm set up t identify which f its prducts may be regarded as nn-cmplex and which are therefre cmplex fr the purpses f the apprpriateness requirements? D these appear satisfactry? 4

5 Hw has the firm satisfied itself abut whether its business mdel invlves persnalised cmmunicatins that may trigger the apprpriateness test? Hw has the firm satisfied itself that the service is being prvided at the initiative f the client? IV.III. What cntrls has the firm set up t ensure that it cmplies with the MiFID apprpriateness and/r executin-nly requirements? Hw has the firm implemented acceptable recrd keeping prcedures in relatin t the apprpriateness test t ensure that it can demnstrate that, in respect f each client, infrmatin has been btained and acted n in accrdance with the requirements? Infrmatin abut knwledge and experience 17. Under Article 37 f the MiFID Implementing Directive, where the apprpriateness test applies (i.e. ther than fr executin-nly transactins), a firm will need t ask fr the fllwing infrmatin frm a client: the types f services and prducts with which the client is familiar; the nature, vlume and frequency f the client s previus transactins; the client s level f educatin; and the client s prfessin r frmer prfessin. 18. Hwever, this is nt an exhaustive r definitive list f infrmatin gathering requirements. MiFID prvides that the precise cmpnents and rigur f infrmatin gathering and assessment will vary accrding t the nature f the client, the nature and extent f the service t be prvided and the type f prduct r transactin envisaged, including their cmplexity and the risks invlved. A firm may als use existing infrmatin it has (unless it is aware that the infrmatin is manifestly ut f date, inaccurate r incmplete) withut requesting mre frm the client, if it is satisfied it has the necessary infrmatin t satisfy the apprpriateness test. Questins n the apprpriateness test What plicies and guidance has the firm frmulated fr its emplyees and representatives abut the level f infrmatin that it regards as acceptable in determining apprpriateness? Where required, what questins des the firm ask its clients? D these questins allw the firm t determine a client s knwledge and experience t understand the risks invlved in relatin t the prduct r service ffered r demanded? D the questins cver the factrs indicated by the requirements f the MiFID Implementing Directive, as relevant? Hw d these questins prperly reflect the nature f the client, the nature and extent f the service t be prvided and the type f prduct r transactin envisaged, including their cmplexity and the risks invlved? 5

6 Hw has the firm tried t establish whether the client has the necessary knwledge/infrmatin abut the risks invlved in relatin t the prduct r service in questin? Des the firm encurage its clients t access infrmatin made available elsewhere? Are these arrangements acceptable? IV.IV. Hw has the firm implemented an acceptable mechanism t keep the infrmatin n which assessments are made regularly updated? Des it have an acceptable mechanism in place fr reviewing apprpriateness in the event f a material change in the relevant infrmatin? Hw has the firm implemented acceptable plicies and prcedures when assessing apprpriateness fr prfessinal clients t ensure that the relevant transactin falls within the categries fr which they have been classified as prfessinal (as set ut in Annex II f MiFID)? Hw des the firm analyse and assess client infrmatin t determine the apprpriateness f each relevant transactin? Des it have acceptable plicies and prcedures in place t achieve this? Frmat f the apprpriateness test 19. Hw the apprpriateness bligatins are best integrated int a firm s particular business mdel and prcesses will be fr each firm t determine. Assessing apprpriateness culd be dne nline, facet-face, ver the telephne r in hard cpy dcumentatin. IV.V. Timing f the apprpriateness test 20. MIFID is nt prescriptive n when the apprpriateness test is dne, s firms may decide at what stage in the sales prcess t assess apprpriateness - as lng as the test is satisfied befre the transactin is executed. IV.VI. Warning the client 21. Under MiFID, if a firm cnsiders, n the basis f the infrmatin received frm its client, that the prduct r service is nt apprpriate fr that client, the firm must warn the client. This warning may be prvided in a standardised frmat. 22. If the client elects nt t prvide the infrmatin t enable the firm t assess apprpriateness, r if he prvides insufficient infrmatin regarding his knwledge and experience, the firm must warn the client that such a decisin will nt allw the firm t determine whether the service r prduct envisaged is apprpriate fr the client. This warning may als be prvided in a standardised frmat. 23. If a client asks a firm t prceed with a transactin, in spite f being given a warning by the firm, it is fr the firm t cnsider whether t d s in the circumstances, taking int accunt the client, the nature f the service, the type f prduct r transactin envisaged, the particular risks fr the client etc. Questins 6

7 What systems are in place t ensure that warnings are given where required and necessary? Are these acceptable? What warnings des the firm have in place: t warn the client that insufficient infrmatin has been prvided s the firm is unable t judge apprpriateness; t warn the client that the prduct/service is inapprpriate; t warn the client that in the prvisin f the executin-nly service the firm is nt required t assess the suitability f the instrument r service prvided r ffered and that therefre the client des nt benefit frm the crrespnding prtectin f the relevant cnduct f business rules. Are these warnings clear and acceptable? What plicies des the firm have in place t decide whether: t deal with a client if the client prvides insufficient infrmatin t allw the firm t assess apprpriateness; t deal with a client if the client demands a service/prduct that the firm believes t be inapprpriate? Are these plicies acceptable? 7