MORNBFI Vol. 1 - Planters Development Bank

APP. Q-1609.12.31(2) The length of time the client has beenactively dealing with investment and/orderivative products, the frequency ofdealings and the extent to which he hasrelied on the investment advice of an FI orany financial advisor, if any;(3) The size and nature of investmenttransactions that have been undertaken bythe client; and(4) The client’s financial standing,which may include an assessment of his networth or the value of his portfolio.An FI must make a record of theclassification under which each client iscategorized, including sufficient informationto support the categorization.Only banks with Type 1 authority or FIswith Type 2 authority may originate ordistribute authorized derivatives products tonon-sophisticated end-users for investmentpurposes. Non-sophisticated end-usersshould be provided greatest protectioncompared to all other client types.c. Suitability reviewBefore presenting, proposing orrecommending a particular derivativesproduct to a client, a dealer shoulddetermine that the derivatives product issuitable to the client’s financial situation andconsistent with the clients’ mandates,financial objectives and constraints.At a minimum, an FI should considerthe following in choosing the derivativesproducts/services offerings to its clients:(1) Investment amount or investiblefunds;(2) Concentration ratio (i.e., assetallocation of the client’s investible funds);(3) Purpose for transacting inderivatives transaction (e.g., hedging vs.investment; long-term buy and hold asopposed to short-term active trading);(4) Holding period or investmenthorizon;(5) Client’s regulatory and legalcircumstances;(6) Liquidity needs;(7) Returns objectives (e.g., income,growth in principal, maintenance ofpurchasing power);(8) Risk tolerance; and(9) Client’s understanding of the risks.An FI should maintain a record of allthe information as bases of its suitabilityassessment. It is highly recommended thatan FI requires a client to sign its conformityto the suitability assessment (including theinformation basis of the assessment) in orderto avoid disputes with the client on itssuitability assessment.For non-sophisticated clients, an FIshould adopt a suitability statementexplaining simply and clearly why theproduct offered is viewed suitable,considering the client’s needs andpreferences. To ensure the statement willbe effective, an FI should consider thefollowing features:(1) Simple and plain language: whentechnical terms need to be incorporated,they should be explained if the client isunlikely to understand their meaning; and(2) Concise and clear messages:lengthy explanations and extensivestatements are likely to reduce theeffectiveness of the statement and make theclient less likely to read the statementproperly.Ideally, each suitability letter fornon-sophisticated clients will be different,reflecting the approach taken by the FIrepresentative in obtaining clientinformation, the derivatives productpresentation, the client’s profile andconsiderations on which the investmentproposal was based, all of which involveprofessional judgment. An FI, however, canapply a degree of standardization to aidquality control. An FI should clearly link itsproposed or recommended derivativesproduct to the client’s own needs, prioritiesand attitude toward risk. An FI may mentionalternative products suitable for the client.The suitability letter should be signed by theQ RegulationsAppendix Q-16 - Page 2Manual of Regulations for Non-Bank Financial Institutions