The effect of GEN 2.2.22AR is that provisions in this chapter marked “EU” also apply in relation to the equivalent business of a third country investment firm as if they were rules.
When providing a service to which this chapter applies, a firm must ask the client to provide information regarding that client’s knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded to enable the firm to assess whether the service or product envisaged is appropriate for the client.
[Note: article 25(3) of
56(1) Investment firms, shall determine whether that client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or investment service offered or demanded when assessing whether an investment service as referred to in Article 25(3) of Directive 2014/65/EU is appropriate for a client.
An investment firm shall be entitled to assume that a professional client has the necessary experience and knowledge in order to understand the risks involved in relation to those particular investment services or transactions, or types of transaction or product, for which the client is classified as a professional client.
[Note: article 56(1) of the MiFID Org Regulation]
55(1) Investment firms shall ensure that the information regarding a client's or potential client’s knowledge and experience in the investment field includes the following, to the extent appropriate to the nature of the client, the nature and extent of the service to be provided and the type of product or transaction envisaged, including their complexity and the risks involved:
(a) the types of service, transaction and financial instrument with which the client is familiar;
(b) the nature, volume, and frequency of the client’s transactions in financial instruments and the period over which they have been carried out;
(c) the level of education, and profession or relevant former profession of the client or potential client.
[Note: article 55(1) of the MiFID Org Regulation]
55(2) An investment firm shall not discourage a client or potential client from providing information required for the purposes of Article 25(2) and (3) of Directive 2014/65/EU.
[Note: article 55(2) of the MiFID Org Regulation]
55(3) An investment firm shall be entitled to rely on the information provided by its clients or potential clients unless it is aware or ought to be aware that the information is manifestly out of date, inaccurate or incomplete.
[Note: article 55(3) of the MiFID Org Regulation]
When assessing appropriateness, a firm may use information it already has in its possession.
If a firm is satisfied that the client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or service, there is no duty to communicate this to the client. If the firm does so, it must not do so in a way that amounts to making a personal recommendation unless it complies with the rules in COBS 9A (MiFID provisions)1.
If the client does not provide the information to enable the firm to assess appropriateness, or if the client provides insufficient information regarding their knowledge and experience, the firm must warn the client that the firm is not in a position to determine whether the service or product envisaged is appropriate for the client.
This warning may be provided in a standardised format.
[Note: article 25(3) of MiFID]
only consists of execution or reception and transmission of client orders, with or without ancillary services, excluding ancillary service (2) in section B of Annex I to MiFID (granting of credits or loans), where the relevant credits or loans do not comprise existing credit limits of loans, current accounts and overdraft facilities of clients;
relates to particular financial instruments; and
is provided at the initiative of the client;
the client has been clearly informed (whether in a standardised format or not) that, in the provision of this service, the firm is not required to assess the appropriateness of the financial instrument or service provided or offered and that therefore the client does not benefit from the protection of the rules on assessing appropriateness; and
the firm complies with its obligations in relation to conflicts of interest.
The financial instruments referred to in (1)(a)(ii) are any of the following:
shares in companies admitted to trading on:
bonds or other forms of securitised debt admitted to trading on:
except those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved; or
other non-complex financial instruments.
For the purposes of this rule, a third country market is considered to be equivalent to a regulated market if it is a market in relation to which the Commission has adopted an affirmative equivalence decision in accordance with the requirements in article 4(1)(c) of Directive 2003/71/EC and the condition in article 4(1)(d) of Directive 2003/71/EC is satisfied.
[Note: article 25(4) of MIFID]
ESMA has published guidelines which specify criteria for the assessment of (i) debt instruments incorporating a structure which makes it difficult for the client to understand the risk involved, and (ii) structured deposits incorporating a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term. The guidelines can be found here: [https://www.esma.europa.eu/sites/default/files/library/2015-1787_-_guidelines_on_complex_debt_instruments_and_structured_deposits.pdf].]
57 A financial instrument which is not explicitly specified in Article 25(4)(a) of Directive 2014/65/EU shall be considered as non-complex for the purposes of Article 25(4)(a)(vi) of Directive 2014/65/EU if it satisfies the following criteria:
(a) it does not fall within Article 4(1)(44)(c) of, or points (4) to (11) of Section C of Annex I to Directive 2014/65/EU;
(b) there are frequent opportunities to dispose of, redeem, or otherwise realise that instrument at prices that are publicly available to market participants and that are either market prices or prices made available, or validated, by valuation systems independent of the issuer;
(c) it does not involve any actual or potential liability for the client that exceeds the cost of acquiring the instrument;
(d) it does not incorporate a clause, condition or trigger that could fundamentally alter the nature or risk of the investment or pay out profile, such as investments that incorporate a right to convert the instrument into a different investment;
(e) it does not include any explicit or implicit exit charges that have the effect of making the investment illiquid even though there are technically frequent opportunities to dispose of, redeem or otherwise realise it;
(f) adequately comprehensive information on its characteristics is publicly available and is likely to be readily understood so as to enable the average retail client to make an informed judgment as to whether to enter into a transaction in that instrument.
[Note: article 57 of the MiFID Org Regulation]
A service should be considered to be provided at the initiative of a client (see COBS 10A.4.1R(1)(a)(iii)), unless the client demands it in response to a personalised communication from or on behalf of the firm to that client which contains an invitation or is intended to influence the client in respect of a specific financial instrument or specific transaction.
[Note: recital 85 to MIFID]
A service can be considered to be provided at the initiative of a client notwithstanding that the client demands it on the basis of any communication containing a promotion for, or offer of, financial instruments made by any means and that by its very nature is general and addressed to the public or a larger group or category of clients.
[Note: recital 85 to MIFID]
Communications to the world at large, such as those in newspapers or in billboards, are likely to be by their very nature general and therefore not personalised communications.
Communications addressed to a client (such as, for example, an email, telephone call or letter), may or may not be personalised depending on the content.
A communication is not personalised solely because it contains the name and address of the client or because a mailing list has been filtered.
If a firm is satisfied that a communication does not contain any personalised content, it may wish to make clear that it does not intend the communication to be personalised and that the personal circumstances of the recipient have not been taken into account.
A firm is required to keep orderly records of its business and internal organisation, including all services and transactions undertaken by it. The records may be expected to include the client information a firm obtains to assess appropriateness and should be adequate to indicate what the assessment was.
56(2) Investment firms shall maintain records of the appropriateness assessments undertaken which shall include the following:
(a) the result of the appropriateness assessment;
(b) any warning given to the client where the investment service or product purchase was assessed as potentially inappropriate for the client, whether the client asked to proceed with the transaction despite the warning and, where applicable, whether the firm accepted the client’s request to proceed with the transaction;
(c) any warning given to the client where the client did not provide sufficient information to enable the firm to undertake an appropriateness assessment, whether the client asked to proceed with the transaction despite this warning and, where applicable, whether the firm accepted the client’s request to proceed with the transaction.
[Note: article 56(2) of the MiFID Org Regulation]