Duties to Clients II

Table of Contents

Investment Research

The market abuse regulations and MiFID have implications for firms that produce investment research. This is research intended to be publicized.

Recommendations are treated as marketing material and must be clearly identified as such. They must specify if the material has not been produced in accordance with the requirements designed to ensure objectivity. Firms must manage conflicts of interest and must ensure that recommendations distributed to clients are fair clear and not misleading.

Investment research in a general sense is not subject to specific requirements. If, however, the material is likely to influence an investor in making a particular investment it must be treated as such. A financial analyst and certain other persons must not trade in investments where they have knowledge as to the likely timing or content of investment research.

General market knowledge or market expectations would not suffice for this purpose. A firm can trade on behalf of another person making an unsolicited client order.

Best Execution

The principle of best execution requires investment firms to take reasonable steps when executing orders to obtain the best result for their clients, taking into account price, cost, the likelihood of execution, settlement size, nature, and other considerations.

What is required will depend on the nature of the client and circumstances. For a retail client, this will generally require the most favourable result in terms of price and associated costs, including fees.

Firms must establish and implement an order execution policy which sets out the firm’s decision making process. There must be procedures to ensure that orders are executed promptly and fairly. Proper records must be maintained.

Firms that execute orders or decisions to deal have different obligations than those that merely transmit or place orders with other entities for execution. Each must take reasonable steps to obtain the best possible result, taking into account all the factors.

Each must establish and implement policies and arrangements and provide information. Each must monitor the effectiveness of information and policies.

The firm executing or implementing decisions must provide retail clients with details in good time regarding the relative importance of factors and execution venues on which the firm relies.

A firm’s obligation is to take reasonable steps to obtain the best possible results. It need not guarantee the best possible result in each and every case. However, it must at least design and implement arrangements and a policy to allow delivery of best execution.

Firms must notify clients of material changes in their execution arrangements or policies. This must be sufficient to enable the clients to make an informed decision as to whether to use the firm’s services.

A firm must obtain express consent from a client to execute an order outside a regulated market if it is possible to execute the order in the instrument concerned on a regulated market.

Conflict of Interests

Investment firms have obligations in respect of conflicts of interest. They must take reasonable steps to identify conflicts of interest between the firm and third parties, as well as between the client and the firm or between clients.

Firms must maintain and operate efficient structures to take reasonable steps to prevent conflicts of interest affecting the interests of their clients. They must establish systems, controls and procedures to manage conflicts.

Firms must maintain an effective written conflict of interest policy. It must identify circumstances giving rise to conflict and specify measures to be taken in order to manage conflicts.

Firms must ensure that their conflicts are controlled. They must ensure effective procedures to prevent or control exchange of information where there is a conflict of interest. There must be separate supervision of persons dealing with clients whose interests may conflict.

Any link between the remuneration of a person whose interests may conflict must be removed. Measures must be taken to prevent or limit any person from exercising inappropriate influence. Measures must be taken to prevent and control the simultaneous and sequential involvement of persons where this may impair the proper management of conflicts of interest.

Where organizational and administrative arrangements are not sufficient to manage conflicts of interest with reasonable confidence that the risk of damage to clients will be prevented, firms must disclose to the client the general nature and sources of conflicts of interest before undertaking business on their behalf. Firms must keep records and update records of investment activity and services where a conflict has arisen or may arise.

Safeguarding & Records

Investment firms must safeguard their client’s ownership of financial instruments. Client funds must be safeguarded, records and accounts must be kept as are necessary to distinguish assets held for one client from another and from their own assets.

Records must be kept in such as way as it ensures their accuracy and corresponds to the financial instruments and funds held on behalf of client. Firms must conduct reconciliation between internal account and records and those held by third parties such as banks or equivalents.

Financial instruments deposited with third parties must be identifiable separately from those of other clients and the entity itself. Client firms must be held in a separate account to that belonging to the firm.

Organizational arrangements must be introduced to minimize the risk of loss or diminution of client assets. All client funds must be promptly lodged to a client account.

Honesty & Best Interests

When providing investment services or other ancillary services, a firm must act honestly, fairly and professionally in accordance with the best interests of the client.

When providing investment services, an investment firm must act early, honestly, fairly and professionally in accordance of the best interests of the client. It must ensure that all information, including marketing communications, is fair, clear and not misleading.

Marketing communications must be identified at such. Appropriate information must be provided in a comprehensible form to clients and potential clients about the firm, financial instruments and proposed investment strategies, including appropriate guidance and warnings of risks associated with investments and particular investment strategies, costs and associated charges, places and market in which execution of transactions will take place.

These must be sufficient to enable the clients or potential clients to reasonably understand the nature of the risk of the investment service and the type of financial instrument that is being offered, so as to be able to take investment decisions on an informed basis. Information may be given in a standardized format.

Suitability

When providing investment advice or portfolio management, an investment firm must obtain information about

the client’s knowledge or experience in the investment field relative to the specific type of product offered by the firm:
the client’s financial situation;
the client’s investment object as necessary for the firm to be able to recommend the investment suitable for the client.

In providing other investment services, it must ask the client to provide information regarding his knowledge and experience in the investment field relative to the product and take that information into account in order to assess whether the product is appropriate.

If the investment firm considers, on the basis of information received, that the investment is inappropriate, it must warn the client. Where the client does not provide the information or provides insufficient information, it must warn the client that the information given is not sufficient to determine whether the service or product is appropriate.

Information to Client

Where information must be provided in a durable medium, the investment firm may provide it other than in paper

if that medium is appropriate in the context of the business relationship,
where the client is offered a choice between information in paper and any other durable medium and chooses the other medium.
information is provided by a website and is not addressed personally.

The investment firm must ensure

information in that medium is appropriate to the client:
the clients specifically consent.
the client is notified electronically of the address and the place where the information may be obtained on the website;
the information must be up-to-date;
the information must be continuously accessible via that website.

Fees & Commission

Investment firms are not to be regarded as acting honestly, fairly and professionally in the client’s best interest if the firm pays or is paid a fee or commission in relation to the investment or service or provides, or is provided with a non-monetary benefit other than a fee or commission or non-monetary benefit provided to or by a client or a person on behalf of a client:

A fee, commission or non-monetary benefit paid or provided to or by a third party or somebody acting as behalf is permissible where the following conditions are satisfied;

the fee is clearly disclosed in a comprehensive, accurate and understandable manner prior to the service;
the payment of the fee or the provision of the non-monetary benefit is designed to enhance the quality of the service and does not impair compliance with the firm’s duty to act in the best interest of the client.
proper fees which enable or are necessary for the provision of investment services, such as legal fees, custody fees, exchange fees, which by their nature cannot give rise to a conflict with the firm’s duty to act fairly and honestly

An investment firm may disclose the essential terms of an arrangement relating to fees or commissions in summary form if it undertakes to disclose further details at the request of the client and honours that undertaking.

The Central Bank may impose additional requirements in exceptional cases where they are justified and proportionate and address specific risk issues.

Client Information Requirements

An investment firm must ensure that all information addressed to retail clients or disseminated satisfies certain conditions. It must

include the name of the investment firm,
be accurate
not emphasize any potential benefit without giving a fair and prominent indication of relevant risks:
be sufficient and present it in a way likely to be understood by the average member of the group or the person likely to receive it;
not disguise, diminish or obscure important items or warnings.

Comparison & Past Information

If the information compares investment or ancillary services or instruments, the comparison must be meaningful and presented in a fair and balanced way. The source for the comparison must be specified and the key assumptions are to be included.

If an indication of past performance of a financial instrument, index or service is given, the indication is not to be the most prominent feature of the communication:

the information includes appropriate performance information based on complete 12 month periods for the immediate five years or, if less, for the immediate period for which the product has been offered.
the reference period and source of information must be stated
the information must contain a prominent warning that the figures refer to past performance and are not a reliable indicator of future results:
the indication if it relies on figures denominated in a currency other than the Euro, the currency is stated together with a warning on the risk of currency fluctuations.
if based on gross performance discloses the effect of commissions, fees and charges.

Where material includes or refers to simulated past performance, it must be based on the actual past performance of one or more financial instruments which are the same as the financial instrument offered, contain prominent warnings that the figures referred to simulated past performance, and the past performance is not a reliable indicator of future performance.

If it contains an indication and information on future performance, it:

must be not based and does not refer to simulated past performance,
be based on reasonable assumptions supported by objective data;
if based on gross performance, the effect of commissions, fees or charges are disclosed;
contains a prominent warning the forecast or not a reliable indicator of future performance.

If a particular tax treatment is referred to, it must state that the tax treatment depends on individual circumstances and may be subject to change.

It must not suggest that the Central Bank endorses or approves the product of the firm concerned.

Retail General Disclosures

Investment firms must give their retail clients the following general information

name, address and contact details,
languages in which the firm communicates;
methods of communication for sending and receiving orders;
statement of authorization and address of the regulator;
if acting through a tied agent, a statement of this;
nature timing and frequency of reports on the performance of the service;
If instruments or client’s funds are held, a description of the steps, which the firm takes to ensure their protection, including summary details of a relevant investor compensation or deposit guarantee scheme,
a description of the conflicts of interest policy together with a right to further information when providing portfolio management.

An investment firm must establish their appropriate method of evaluation and comparison, such as a meaningful benchmark based on investment objectives and the type of financial instruments in the portfolio, so as to enable the client to assess the firm’s performance.

Where the services are being provided to a retail client, the firm must also give

information on the method and frequency of the valuation of instruments in the portfolio
details of the delegation of discretionary management,
specification of the benchmark against which the portfolio performance will be compared
types of instruments that may be included in the portfolio and transactions that may be carried out in such instruments, including limits
management objectives,
The level of risk is to be reflected in the manager’s exercise of discretion, as well as any specific constraints on that discretion.

Description of Risks

An investment firm must give the clients or potential clients a general description of the nature and risks for financial instruments taking account the client’s categorization as retail or professional, and ensuring that the description explains the nature of the types of instruments, the particular risks attaching, in sufficient detail to enable the client to make an informed decision.

The investment firm must ensure that the description of risks includes, where relevant to the type of instrument concerned and the status and level of knowledge of the client the following:

risk associated with that type of instrument, including an explanation of leverage and its effects and the risk of losing the entire investment;
the volatility of the price of the instrument and any limitations on the available market;
the fact the investor must assume as a result of transactions, financial commitments and other obligations, including additional contingent liabilities
margin requirements or similar obligations applicable to the instruments.

Where investment related to public offering and a prospectus has been published, the firm must inform the client that the prospectus is available.

Where a financial institution comprises two elements that are greater than the risk of the individual elements, the investment firm must describe the component and how the interaction increases the risk.

Where an instrument incorporates the third party guarantee, an investment firm must provide information about the guarantee in sufficient detail to enable the client to make a fair assessment of the guarantee.