On 6 July 2012, ESMA published two final sets of Guidelines aimed at enhancing the protection of investors in the EU.  These Guidelines relate to the MiFID provisions relating to

• The suitability of investment advice/portfolio management services
• The compliance function

The publication of these Guidelines follows two public consultation papers issued in December 2011.  By issuing the Guidelines, ESMA expects to promote greater convergence in the interpretation of and supervisory approaches to, MiFID suitability and compliance requirements.

Both sets of Guidelines apply to MiFID firms, including credit institutions that provide investment services, UCITS management companies (but only when they are providing the investment services of individual portfolio management or of investment advice) and to competent authorities. The Guidelines will become operational within two months of their publication by the Central Bank.

Suitability

Firms which provide the key MiFID services of “investment advice” or “portfolio management services” must ensure that any investment product recommended is suitable for the client before providing that service.  There are nine general Guidelines together with supporting Guidelines. The Guidelines essentially focus upon the requirement of the MiFID firm itself to carry out the suitability assessment and the onus upon investment firms to put in place adequate policies and procedures to enable them to understand the essential facts about their clients and the characteristics of the financial instruments made available to those clients. Investment firms need to determine the extent of information to be collected from clients in light of all the features of the investment advice or portfolio management services to be provided to these clients e.g. when providing access to complex or risky financial instruments firms should carefully consider whether they need to collect more in-depth information about the client than they would collect when less complex or risky instruments are at stake.  Firms that rely on tools in the suitability assessment process (such as model portfolios, asset allocation, software etc.) should have appropriate systems and controls to ensure that the tools are fit for purpose and produce satisfactory results.  The Guidelines also cover other matters including staff skills, education and expertise and record keeping.  Firms would be advised to carry out a review of their current approach towards dealing with client suitability in light of the Guidelines.

Responsibilities of the Compliance Function

MiFID requires investment firms to establish, implement and maintain adequate policies and procedures designed to detect any risk of failure to comply with their obligations under MiFID.  As part of this, the compliance function should identify the level of compliance risk the investment firm faces, taking into account the investment services, activities and ancillary services provided by the firm as well as the types financial instruments traded and distributed.  The firm should generally not combine the compliance function with the internal audit function.  The combination of the compliance function with other control functions may be acceptable if this does not compromise the effectiveness and independence of the compliance function.  Any such combination should be documented.

For further information, please contact one of the key contacts listed above or your usual contact in our Asset Management and Investment Funds Team.