Review of suitability requirements finds many investment firms fail to meet the required standard

• Suitability requirements are there to ensure client investments align to investment objectives and personal circumstances.
• Boards are required to rigorously examine their suitability governance framework on a continuous basis.    
• MiFID II regulations will introduce significant changes to suitability requirements by placing a number of the Guidelines on a statutory footing and by introducing new requirements.

The Central Bank of Ireland has carried out a themed review to examine the suitability processes of investment (PDF 614.2KB)firms. Suitability is the process by which firms take all reasonable steps to ensure that a client’s investments align to their investment objectives and personal circumstances. The review focused on the information gathering phase of the suitability process and firms were assessed for compliance with the European Securities and Markets Authority (ESMA) Suitability guidelines.

The review found that:

• Firms could not demonstrate that suitability policies and procedures were implemented in practice.
• Application forms did not contain fields for the collection of required information and / or were found to be incomplete.
• Not all firms could demonstrate that they had effective governance structures and appropriate tools to successfully implement and assess suitability. A number of firms relied on client self-assessment of knowledge, experience and financial situation and failed to counterbalance self-assessment with an independent objective assessment.
• Dependencies on basic IT systems for the management of suitability processes increased the likelihood of human error.
• Governance structures for the identification and treatment of vulnerable clients were absent or ineffective.

Director of Asset Management Supervision, Michael Hodson, said: “The review highlighted that firms need to improve the quality of information collected and how this information is utilised in the suitability process. With the introduction of higher suitability standards under MiFID II, the quality of the information collected is all the more significant. Boards are reminded that they are responsible for implementing an appropriate governance framework that meets the suitability regulatory requirements and embeds a client-centric culture across the firm. Investor protection is at the core of the Central Bank’s mandate. It is critical that each Board has confidence that the policies and procedures it has approved are being implemented in practice to ensure client investments align to their investment objectives and personal circumstances.”

Where the Central Bank identified risks to consumers, due to the issues outlined above, formal supervisory requirements have been imposed on the relevant firms.