Firms must enhance measures to protect consumers when selling complex investment products – Central Bank of Ireland

• Central Bank publishes findings from inspection of investment firms’ compliance with appropriateness test for consumers.
• Appropriateness test requires firms to assess information on the consumer’s knowledge and experience and to determine whether a product is appropriate.
• 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.

The Central Bank has published the findings of a Thematic Inspection of investment firms’ compliance with their legal requirements to determine whether a product is appropriate for their customers. The appropriateness requirements are a key protection for consumers at the point of sale when purchasing complex investment products without financial advice or a recommendation.

Firms are required to gather and assess information on the consumer’s knowledge and experience in order to determine whether the product is appropriate for them. If the product is not appropriate, they must issue a clear warning to the consumer.

The main findings of the inspection are:

• 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 found evidence of 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 has also sent a letter (PDF 111.73KB) to all MiFID firms, detailing the findings of the inspection together with recommendations to enhance their compliance arrangements, where relevant.

Gráinne McEvoy, Director of Consumer Protection said:

“Correct application of the appropriateness requirements is critical to ensuring consumers make an informed investment decision. Firms are obliged at all times to act in the best interest of consumers and the findings of this inspection show that this key component of the rules protecting consumers is not being fully complied with in several firms.

“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.”

Notes

• The inspection was carried out as part of an ESMA (European Securities and Markets Authority) Common Supervisory Action. This was the pilot version of a supervisory initiative designed to enhance the protection of consumers and promote consistent supervision of investment firms throughout the EU.
• The Central Bank is continuing its commitment to European supervisory initiatives that seek to enhance the protection of consumers. A Common Supervisory Action on Suitability, focusing on measures designed to protect consumers availing of investment advice, is currently underway.