Inspection found evidence that a number of firms are not paying sufficient attention to the requirements when selling complex investment products, instead placing undue reliance upon ‘box-ticking’ to demonstrate compliance.
The Central Bank of Ireland today published findings from its inspection of investment firms’ compliance with appropriateness test for consumers.
The European Union’s Markets in Financial Instruments Directive (MiFID II) requires firms to complete a thorough and robust assessment of a client’s knowledge and experience in order to determine whether the product or service is appropriate for that client. Investors purchasing complex products without financial advice may be exposed to significant risk, as these products often have extremely complicated structures and features that make it difficult for clients to understand the associated risks.
Firms must issue a clear warning to the client if they consider that the product is not appropriate for that client. It is critical that clients are adequately warned when products are not appropriate, thus enabling them to make informed investment decisions.
Appropriateness tests require firms to assess information on the consumer’s knowledge and experience and to determine whether a product is appropriate.
The inspection found evidence that a number of firms are not paying sufficient attention to the requirements, instead placing undue reliance upon ‘box-ticking’ to demonstrate compliance. Several firms failed to provide evidence that they are paying sufficient attention to the application of the appropriateness requirements, instead placing undue reliance upon standardised questionnaires and ‘box-ticking’ to demonstrate compliance.
In many cases, firms’ practical application of the requirements was undermined by weak processes, systems, and controls; resulting in errors and assessments proceeding with incomplete information.
Many firms are relying on a blanket approach for gathering client information that fails to consider the significant differences in risk and complexity that occurs between investment products. Firms need to improve the quality of information collected.
In many cases, it was not clear how firms reached the appropriateness decision.
The review also revealed inadequate and weak warnings issued where products were found to be inappropriate for clients, including the use of vague, ambiguous language. The appropriateness warning should not be viewed by firms as a disclaimer which overrides the legal obligations of firms to act in the best interests of the consumer.
The Central Bank is engaging directly with those firms where issues have arisen.
“The Central Bank is now engaging directly with the firms concerned to address the shortcomings that have been identified. The appropriateness test is a key component of consumer protection for people who are using the services of an investment firm, and we want to ensure these rules are being complied with in spirit as well as in law,” said Gráinne McEvoy, Director of Consumer Protection.