Duties to Clients I

Table of Contents

MiFID & Investment Firms

The MiFID, Markets in Financial Instruments Directive, applies to investment firms, stockbrokers and credit institutions such as banks when providing investment services. It also applies to businesses operating multilateral trading facilities, most futures and options firms and some commodities firms.

It does not apply to those offering insurance policies, tracker bonds or PRSA. It does not apply to multi-agency intermediaries and authorized advisors unless they engage in services or financial instruments that require a higher level of authorization.

The MiFID legislation provides detailed requirements for investment firms. This includes information to be given to clients;

assessment of suitability and appropriateness.
obligations to use reasonable steps to obtain the best results
avoidance of conflicts of interest;
provisions in relation to inducements,
furnishing of information,
obtaining consent of clients.

Classification of Clients

Investment firms must categorize their clients as professional or retail clients. A further categorization of “eligible counterparty” applies to a range of other investment firms and financial institutions.

Certain entities are automatically classified as professional clients. This includes entities regulated to operate in financial markets, large businesses, pension funds, collective investment schemes, government and institutional investors whose main activity is to invest in financial instruments.

Other clients must be categorized as retail clients. Retail clients enjoy a higher level of protection. Some retail clients may qualify to elect to be treated as professional clients.

The firm must be satisfied and demonstrate that the client possesses market knowledge and experience to make investment decisions and understand the risks. The client must be able to meet two of the three criteria;

carried out an average of 10 relevant transactions per quarter over the previous four quarters
portfolio exceeding €500,000;
worked for at least one year in a relevant professional position in the financial sector.

The client must state in writing that he wishes to be treated as a professional client. The firm must give certain warnings of the protections that apply the law. The client must acknowledge in writing that he is aware of the consequences once treated as a professional client.

In the case of a corporate client, the experience of the underlying officers, such as the Chief Financial Officer, is the relevant criterion. If the corporate client has expert advice, the investment firm may be permitted to treat it as a professional.

Clients who are treated as professional clients under the pre-2007 Regulations may continue to be so treated. They must be informed about the conditions for continued categorization above. It is possible for clients to seek to change their status with investment advisor. The firm must agree to the re-categorization.

Professional clients are permitted access to wider and riskier categories of investment. Professional clients must inform investment firms of circumstances that could affect their categorization. If a firm becomes aware that the client no longer qualifies as a professional client, it must take appropriate actions.

Suitability

Investment firms must ensure their investment advice or portfolio management services are suitable for clients, whether professional or retail. The firm must obtain sufficient information to make an adequate and objective assessment.

Suitability must be based on the client’s experience, knowledge, financial situation, and investment objectives. Investment firms should not recommend services or products where the requisite information is not provided by the client or potential client.

Sufficient information covers information on the types of service and financial instruments with which the client is familiar, the nature and volume of the client’s transactions and his or her level of education or profession.

Investment firms must warn their clients if they believe a particular investment service or product is inappropriate. Where sufficient information is not available, they must warn the client that they cannot determine whether the service or product is appropriate.

Investment advice or portfolio management services must be suitable. The firm must conclude that

the client is financially able to bear the investment risk, including actual losses and losses to funds in the context of its investment objective strategy
that it meets the objectives of the client
that the client can understand the risks.

In executing or receiving transmitting orders for non-complex instruments at the client’s initiative, it is not necessary to determine appropriateness, provided that the firm has informed the client that it is not required to assess suitability and that the firm complies with conflicts of interest obligations.

Fact Finding

The information which the firm must gather to determine suitability and appropriateness depends on the circumstances. It will cover information in relation to knowledge and past experience, financial circumstances and investment objectives.

The information is commonly gathered by way of a fact-finding form. The information must be retained and recorded by the investment firm or institution. A single form need not be used. A series of meetings may constitute part of the “know your client” record.

Execution Only

Firms may provide execution-only business in respect of non-complex instruments. It must be provided at the client’s initiative only. The client must be clearly informed that the firm is not required to assess suitability and the firm must comply with conflicts of interest requirements.

In order to be considered non-complex, the investment or instrument must not be a derivative, must be highly liquid, must not involve actual or potential liability which exceeds the cost of acquiring it, and adequate information must be publicly available and easily comprehensible.

Shares may or may not fall within the category of complex instruments. The firm may determine that shares fall within the above criteria.

Suitability Prof Clients

The requirement for appropriateness and suitability of investments applies to retail and professional clients. However, retail clients enjoy a higher level of protection. The firm must obtain all relevant information required by the regulations, depending on the nature of the service.

In the case of a professional client, the firm may assume the client has the necessary level of knowledge and experience for the product and service for which he has been categorized as professional. When providing investment advice to a client who is deemed professional automatically, the firm may assume he is able to take the requisite financial risk. The assumption that the client may financially bear the risks, does not apply to retail clients or to portfolio managed services to professional clients.

If a professional-client wishes to use complex instruments, the firm should ensure that he or she meets the criteria for professional categorization with respect to those instruments. If a professional client trades in familiar instruments but significantly increases the volume or value of trades, the firm must ensure that the trading remains suitable and in light of the professional client’s investment objectives.

Investment firms may rely on the know your client information provided by third parties on behalf of the client. They may rely on recommendations made by another investment firm. Otherwise, they must obtain the necessary information either from the client or a third party to enable the firm to recommend a service or instrument that is suitable.

Firms may rely on existing client information and knowledge in respect of the suitability and appropriateness test. However, the information must be sufficiently accurate and up-to-date. Firms need not reestablish appropriateness for subsequent transactions within the same type of instrument or service unless the client advises the firm of a material change of circumstances, which will impact the determination of appropriateness.

If a firm gives the required warning in writing that a transaction is not appropriate, it may proceed to execute the request on behalf of the client. The warning must be provided in writing.

Information to Clients

Investment firms must send clients information in relation to certain matters. The purpose is to enable them to make an informed decision. Retail clients must receive general information about the firm and its services.

Clients must receive sufficiently detailed information about the cost and charges. A range of information must be disclosed to clients prior to the provision of a service. The range of information required in respect of a retail client is wider than that in respect of a professional client.

Generally, the information to be provided includes

terms of business/management agreement,
notification of categorization where relevant;
order execution policy as applicable;
summary of conflicts of interest policy.

The information must be sent in a durable information medium. This may include by a website in accordance with certain criteria. Certain information may be furnished by website subject to conditions.

The following information must be provided in a durable medium

conflicts of interest policy;
information concerning client categorization;
periodic statements.

Certain other information may be provided online.

A durable instrument includes paper, and also an instrument which enables the client to store information addressed personally to the client in a way accessible for reference.

Information & Best Interests

The requisite information must be provided to retail clients in advance of an investment decision. The information must be given in good time in advance before the provision of the services, so that the client has a sufficient opportunity to read and understand the information provided before taking the investment decision.

An investment firm must act in the best interests of its client. All information provided including marketing communications must be fair, clear and not misleading. This covers retail and professional clients.

Investment businesses may provide a single term of business where they’re providing both investment services and services covered by the Consumer Protection Code.

Firms which provide services other than investment advice to retail clients must provide a written agreement setting out essential rights and obligations of the firm and the client.

Promotion Material

Promotion material sent to clients must meet certain obligations. The appropriateness test must be conducted in advance on any transaction, but not necessarily prior to sending an advertisement.

The regulations require marketing communications to be clearly identified as such. The content of any advertisements must be fair, clear and not misleading.

Regular Information I

Clients must be informed on a regular basis and in sufficient detail of the services being provided for them. There are three types of reporting obligations for investment firms,

portfolio management cases.
Non-portfolio management case,
obligations regarding financial instruments or funds owned by the client.

Where the service provided is one of execution of orders other than portfolio management, the main obligation is to provide contract notes for each transaction. The contract notes must contain the specified information and must be sent to the client as soon as possible and no later than the first business day following execution.

In the case of a professional client, the firm must provide the client with the essential information concerning the execution of the order in a durable medium.

Where the services provided is portfolio management then the client must be provided with a periodic statement in a durable medium. The frequency and content are not set and depend on the industry practice.

Regular Information II

In the case of retail clients, the statements must contain at least the information specified in the regulations. Periodic statements must be provided to retail clients at least every six months. Where requested, it must be provided once every three months. Clients must be informed that they have a right to make this request.

Contract notes are not required where the firm provides portfolio management services. Clients may elect to be provided with them.

The clients must be furnished information in respect to fees and charges. These need not necessarily be included in the periodic statement, if it has been otherwise provided.

Where a retail portfolio-managed client has a leveraged portfolio, reporting must be undertaken by way of the monthly periodic statement. Where a firm holds client monies and assets, it has reporting obligations under the Central Bank’s client money requirements.

Information may be disseminated in a durable medium other than paper where the provision of information in this medium is appropriate. This would apply if the client has an e-mail address and where the client has chosen to receive information in that medium.

Where an investment firm executes transactions other than portfolio management, essential information must be provided to professional clients. In the case of retail clients, more detailed information is to be given d within five business days following execution. There is no need to provide contract notes in relation to portfolio management.