Relaunch Investment Suitability

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3.3 Documentation at the Point of Sale FINMA proposes regulations comparable to those of the MiFID regarding the definition of investment risk and fee transparency. Moreover, FINMA is considering the introduction of an obligation to document the client’s risk profile, including the reasons which have led to a concrete recommendation (risks, profit opportunities and costs of products, etc.) and thus goes further than the MiFID. Simplified representation less comprehensive MiFID FINMA Discussion Paper MiFID Consultation Paper * Germany, Great Britain, Italy, France, Hong Kong and Singapore existing regulations under discussion • Germany: It is mandatory to issue written protocols detailing all investment consultations received by private clients since 1 January 2010: Among other things, this document must list the recommendations given, and must be signed by the investment adviser. The MiFID does not contain a similar protocol obligation. • Great Britain: Extended documentation requirements at the POS (including suitability reports or key features documents ) for certain financial instruments (e.g. life and pension insurance) which exceed the MiFID standard in form and content. • Italy: Clarification of the mandatory content of advisory contracts which must be concluded with retail investors. In addition, specific guidelines for the classification of illiquid products; the complexity and risks relating to liquidity, market and counterparty must be taken into account and the fee structure must be described. Regulations in selected countries * more comprehensive 14 Ernst & Young Relaunch Investment Suitability The MiFID consultation paper also advises informing clients in writing of the reasons which lead to an investment recommendation; this also includes an explanation of how the recommendation matches the investor profile. Trend It is necessary to develop appropriate processes for documenting the advisory process and understand the steps performed while formulating a concrete investment advice (“audit trail”). Some regulatory authorities require a formalized advice protocol, while others require proof of how appropriate advice leads to a suitable recommendation. In other words, it’s not just about ensuring that the investment recommendation is appropriate, but also essential that financial institutions are able to demonstrate the suitability of advisory services. • France: Telephone conversations with customers must be recorded and retained for at least six months. The Financial Market Supervisory Authority recommends classifying products into at least two groups. A quantitative method based on scoring is recommended for client classification. • Hong Kong: Obligation to create a client risk profile; clients must be aware of this, understand the content and give their consent. The products must be classified according to risk; sales restrictions exist for certain products. Guidelines regarding audit trails and independent controls also exist. • Singapore: Comparable to the Hong Kong regulations.
3.4 Client segmentation FINMA supports product-neutral client segmentation in qualified and retail clients in line with the MiFID. This distinction allows the regulations to be oriented toward retail clients. Simplified representation less comprehensive existing regulations under discussion FINMA Discussion Paper Singapore MiFID Germany France • Italy: Professional clients must also understand the liquidity risks when purchasing illiquid products. • Hong Kong: Selected structured products, such as accumulators or decumulators, should only be sold to professional clients; maximum care should be applied with private investors. • Singapore: Wealthy private clients should be considered institutional investors and are excluded from investor protection. Specific national client segmentation regulations for special financial constructs, for example British “child trust funds”, will not be discussed here. MiFID Consultation Paper GB Italy Hong Kong more comprehensive Ernst & Young Relaunch Investment Suitability However, the division of clients into three categories (retail investor, professional clients and eligible counterparties) is called into question once more in the MiFID’s consultation paper; a judgement by the European Commission has shown that, in practice, risk comprehension by some professional clients proved inadequate, particularly in the case of very complex products, something which has resulted in legal disputes. Trend A clear trend is not evident. In practice, however, the distinction between ordinary and professional clients with regard to conduct at the point of sale has not resulted in the expected benefits. Professional clients also require a detailed risk disclosure as regards specific products. 15
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