Central Bank of Ireland publishes “Dear CEO” letter to investment firms with regard to suitability requirements
With less than five months remaining until MiFID II implementation, the regulator has conducted a suitability review to observe how firms were progressing with the significant challenge of preparing for the new rules.
The Central Bank of Ireland continues with its monitoring of how the investment firms it regulates are prepared for the coming implementation of MiFID II. Recently, FinanceFeeds has reported of changes made to the Consumer Protection Code in line with MiFID II rules. The efforts of the regulator continue.
Today, the Central Bank of Ireland published a “Dear CEO” letter, in which it provides a summary of the findings of a recently completed themed review of suitability processes of investment 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.
With less than five months remaining until MiFID II implementation, the review has shed some light on how firms were progressing with the significant challenge of preparing for MiFID II. MiFID II regulations apply significant changes to the suitability requirements by introducing a number of new requirements, including suitability statements, annual suitability assessments and the need to ascertain additional information from clients in relation to risk tolerance and capacity for loss.
The review focused on the information-gathering phase of the suitability process and the firms were assessed for compliance with the ESMA “Guidelines on certain aspects of the MiFID suitability requirements”.
The review has found that the majority of inspected firms failed to fully comply with the ESMA Guidelines. More precisely:
- Firms could not demonstrate that the documented suitability policies and procedures were implemented in practice.
- Client take-on application forms did not contain specific fields for the collection of required information and / or were found to be incomplete i.e. fields left blank.
- Not all firms could demonstrate that they had effective governance structures and appropriate tools to successfully implement and assess suitability. Some firms relied on client self-assessment of knowledge, experience and financial situation and failed to use an independent objective assessment.
- Dependencies on basic IT systems for the management of suitability processes raised the likelihood of human error and did not facilitate second line controls carrying out monitoring.
- Governance structures for the identification and treatment of vulnerable clients were either absent or ineffective.
The letter also says that there are “best in class firms that have completed detailed gap analyses and are in the process of implementing MiFID II”.
The Central Bank instructs investment firms to submit this letter for discussions and consideration to their boards before October 31, 2017. Matters raised in this letter may be considered by the Central Bank during the conduct of future inspections.