The draft guidelines are largely based on those already existing under MiFID I.
The draft guidelines are largely based on those already existing under MiFID I, but have been augmented to reflect the results of national supervisory activity, recent studies on behavioural finance and developments in automated advice tools.
Importantly, ESMA does not expect to release the final guidelines until the first half of 2018, after the MiFID II implementation deadline of 3 January 2018. This leaves firms in the unfortunate position that they may need to review their systems and processes very shortly after implementation.
ESMA notes that the assessment of suitability is one of the most important requirements for investor protection in the MiFID II framework. It applies to the provision of any type of investment advice (whether independent or not) and to portfolio management services. Firms have to provide suitable personal recommendations to their clients or have to make suitable investment decisions on behalf of their clients.
Suitability has to be assessed against clients’ knowledge and experience, financial situation and investment objectives. To achieve this, investment firms have to obtain the necessary information from clients.
The purpose of the draft guidelines is to enhance clarity and to foster convergence in the implementation of certain aspects of the new MiFID II suitability requirements. They will replace the existing ESMA Guidelines issued in 2012 in relation to the MiFID I requirements. Most existing material is retained, but it has been re-ordered and augmented. At Annex IV is a navigational table that maps where the existing guidelines will sit within the new guidelines. New requirements covered are costs and complexity of equivalent products (Guideline 9) and costs and benefits of switching investments (Guideline10).
The draft Guidelines are augmented throughout to take into account the results of supervisory activities conducted by national competent authorities on the application of the MiFID I suitability requirements, technological evolution in the advisory markets (e.g. robo-advice) and recent studies on behavioural finance.
On August 29th, the Central Bank of Ireland published the findings of their themed review to examine the suitability processes of investment firms. This themed review was focused on firm’s compliance with the MiFID I ESMA Guidelines, referenced above as well as Regulation 76(3) and 94 of the 2007 MiFID Regulations.
The Central Bank of Ireland’s findings highlighted that firms needed to improve the quality of the information collected and how they utilize this information in the suitability process. The review also found that:
The objectives of the ESMA MiFID II suitability assessment, as well as the key principles underpinning the regulatory requirements, have remained unchanged, but the obligations have been further strengthened and detailed by:
ESMA is seeking views (PDF 740 KB) on its draft guidelines by 13 October. It aims to publish responses by end-2017/early 2018, but the final guidelines will not be available until the first half of 2018. Given the MiFID II implementation date of 3 January 2018, this could result in the unsatisfactory position of firms having to review their systems and processes within a few months, or even weeks, of completing their MiFID II implementation projects. It is not clear whether there will be any regulatory forbearance.