Implications of suitability ESMA guidelines

On 6 July 2012 the European Security and Markets Authority (ESMA) published guidelines for the suitability of services for investment consultancy and asset management. From the end of 2012 or the beginning of 2013 all investment companies offering these forms of service will have to observe these guidelines. The AFM will keep a close watch on this. In this news item we look at the impact these directives will have on investment consultancy and asset management.

It is expected that the AFM will convert the ESMA guidelines (see also: What are guidelines and what is their status?) into policy (Q4 2012).

What are the implications of the guidelines for the suitability of investment consultancy and asset management?
The Guidelines, published on July 6 2012 (ESMA/2012/387), actually consist of nine specific guidelines. Each one of these covers a different subject, and for each subject first the general principle is described and then the concrete stipulations concerning the content. Some of these stipulations are free, principle-based and general; others are very rule-based and specific. Furthermore, several guidelines are accompanied by such an explanation that another concrete vision and interpretation of ESMA can be deduced from it.

The following nine subjects have been incorporated into the guidelines:


1. Information to clients on evaluation of suitability of the service

2. Guarantee an understanding of clients and their investments

3. Staff expertise in investment company

4. Extent of information to be obtained from the clients (proportionality)

5. Reliable information from clients

6. Updating client information

7. Gathering information from companies or other groups


8. Measures to guarantee the suitability of investments


9. Storage of data on (establishing) the suitability of services


The guidelines are aimed at investment companies that lend investment services as ‘consultancy’ and ‘asset management’, such as (independent) asset managers and banks.

Although the guidelines are specifically aimed at the service to non-professional investors, ESMA clearly states that the guidelines, in so far as relevant, also apply to services to professional investors. Therefore it is wise that investment companies that only render services such as consultancy and asset management to professional investors, like asset managers, become acquainted with the guidelines and implement the relevant requirements.

Elaboration of the guidelines
Below you will find a short description of each guideline with an explanation. This is followed by a brief indication of the impact the guideline will have for the average investment company. Please do realise that not all (sub) stipulations of a guideline will be discussed.

1. Information to clients on evaluation suitability of service
Companies need to make clear to their clients why they consider their service appropriate for the client. This is partly to make (new) clients aware of the fact that it is important to provide the investment company with sufficient and correct information regarding their knowledge, experience, investment objectives, financial position and willingness to run risks. It also has to be made clear to the client that it is the investment company’s responsibility to decide which kind of service or which kind of financial instruments are suited to the client.

The impact of this directive is small. The first directive contains a number of norms, which can be embedded into a standardised and therefore relatively easy manner into the pre-contractual supply of information. However, you need to be aware that this guideline consists of a great number of sub norms.

2. Guarantee an understanding of clients and their investments
Investment companies must dispose of adequate procedures and measures to be able to establish the necessary client data and the characteristics of financial instruments in which the clients can invest. For certain parts the directive is also an indication of the type of information that needs to be obtained from the client. This information concerns, among other things, marital status, family situation (is one’s child going to take up a study in the short term) and type of employment (fixed or temporary employment contract, self-employed, term until retirement). In addition the investment company has to warrant/guarantee it is sufficiently abreast of the characteristics of the financial products it consults the client on or it invests in for the client.

The impact of this guideline is average. The standards of guideline 2 are close to the requirement of the Wft concerning the client profile. On a number of points, however, ESMA does specify the depth of the information to be listed. For many investment companies the directive will be a good occasion to have a close look at the entire process revolving the inventory of data of the clients.

3. Staff expertise in investment company
Investment companies need to take care that staff involved in the service process with the client have the necessary knowledge and experience. Among other things, this concerns knowledge and experience in order to be able to assess the client’s needs and wishes, including expertise about the financial markets and financial instruments to be able to decide whether this fits these needs and wishes. There also has to be sufficient knowledge of legislation and regulation and internal procedures and measures. These requirements of the professionalism of staff may not seem particularly special, but you need to be aware that you have to be able to demonstrate, if necessary for each employee individually, that this knowledge and experience are present.

This guideline has a large impact. Up till now, there have been no legal requirements regarding the professionalism of employees of investment companies. That fact in particular gives this guideline a big impact. Despite the fact that the directive is not too demanding, many investment companies will have to work hard to be able to comply with the specific demands in this field and be able to demonstrate this to the supervisor.

4. Extent of information to be obtained from the clients (proportionality)
With regard to the amount of information to be obtained from their clients, investment companies can take into account the character of the services and the financial instruments offered by them. For a large number of situations the guideline indicates to what extent more information needs to be obtained. The difficult aspect of the provisions in this directive is that ESMA remains rather general. EMSA indicates in particular that in a given situation more information needs to be obtained, but without describing the information concerned and when the information obtained is sufficient. The compliance with this directive is further troubled by the fact that the information that needs to be obtained also depends on the character, needs and circumstances of the client and can therefore vary per client.

The impact of this guideline is average. Just like with guideline 2 this one is not very different from the legal standard concerning client profiles. Therefore, guideline 4 may be very helpful in improving the inventory process of the client data and to adapt it to current requirements.

5. Reliable information from clients
Investment companies need to implement measures to guarantee as much as possible that the information obtained from the clients is just and reliable. Among other things, this means that the investment company has to take care that its clients have enough understanding of the questions they are asked. Furthermore, the investment companies are ‘ordered’ to avoid closed multiple-choice questions as much as possible and to pose sufficient open questions, in which the client has to actively give information. When the inventory process is highly standardised and automated, an investment company needs to make sure that the information yielded is usable and that for instance conflicting answers are examined. In conclusion it is being stressed that investment companies should not only consider the given answers individually, but rather that they should also pay attention to the consistency of all the answers given in the questionnaire.

The impact of this guideline is average to large. This guideline sets down clear standards with regard to the process of obtaining information for the client profile. In particular investment companies that work a lot with standardised questionnaires, will have to significantly adapt parts of their process.

6. Updating client information
Investment firms are required to have current information concerning the client’s background. The guideline requires that investment companies should decide for themselves which information needs to be periodically updated and how often. The risk profile of the client and the character of the service are of particular importance. ESMA also states that updating the profile is advisable when certain relevant developments from the client might for instance, influence his financial position or the client’s objectives, or for example when he reaches retirement.

The impact of this guideline is low to average. The guideline sets down clear standards concerning the obligation to update the client’s data. In particular the requirement that the scale and frequency of updating may differ per client type, means that some investment companies will have to make a substantial effort to meet this guideline. Investment companies that sit down and discuss matters with their clients on a regular basis will have to do little extra to comply with this guideline.

7. Gathering information from firms or other groups (including married couples)
In many cases the ‘client’ is not one natural person, but there are more natural persons (like a married couple) or one or more persons who represent the (end-) client (as with a company). In these cases you need to know for which person(s) information has to be obtained. According to ESMSA investment firms must work out a policy on how to deal with these situations. The starting point must be the protection of the interests of all persons involved. If a client is represented by another person for instance, an inventory must be made of the client’s financial position and objectives, while information is needed on the other person’s knowledge and experience. If more than one person needs to be considered as a client, the investment firm must evaluate which person needs to be considered as relevant. According to ESMA, in many cases this will be the one with the weakest financial position.

The impact of this guideline is large to very large. You must realise that the number of clients this guideline applies to, clients consisting of more than one individual, can be extremely big. In view of the many thinkable situations and the potential responsibility risks it is important that the investment companies think deeply about the policy suggested by ESMA to make an inventory of data from these clients. Of course, the policy still needs to be translated into specific procedures and measures.

8. Measures to guarantee the suitability of investments
ESMA states that an investment firm cannot ‘automatically’ recommend the same financial instrument to a group of clients who have been allocated into the same risk category by that company. With each investment decision or consult the investment company needs to decide for each client individually, whether the concerning financial instrument fits within the existing portfolio of the client, including asset allocation, and also whether the risks and costs of the investment fit the client’s profile. What also needs to be established is whether the minimum or probable ‘holding period’ is suitable for each individual client, for instance in case of illiquid investments.

The impact of this guideline is large. For many investment companies it is ‘customary’ to advise the same financial instrument to all clients in a risk category (‘very offensive’, ‘neutral’). ESMA wants this to change. Investment companies must therefore think harder about the way they can adapt their advisory and investment decision process so as to meet standards without resulting in excessive work load and high costs.

9. Storage of data on (establishing) the suitability of services
Investment companies must keep the data listed in the client profile, as well as data on each advice or investment decision in a structured, transparent and accessible way. This must enable the investment company and the supervisor to form a good picture (afterwards) of the how the inventory was made. How the data obtained from the client are interpreted by the investment company should be traceable. Advice or investment decisions should also be retrospectively reconstructed.

The impact of this guideline is small. On the basis of Wft investment companies are already expected to keep all relevant information on or from the client for at least five years. For investment companies it is important to realise that ESMA not only expects that the information obtained from the client and the information on given advice are being stored, but that also the data are kept on how this information, including modifications, are being interpreted. For many investment companies this implies they will have to keep more data than they have assumed up till now. For them it is particularly important to set up a good process to this end.

What to do?
Although the guideline is not expected to come into force until the end of 2012 at the earliest, it is important that the investment companies already set to work in preparing the ground for the implementation of these requirements. Working out an impact assessment and an implementation plan is a logical first step.

Have you already made an analysis or do you still have to start? We can assist you with the analysis you have made or we can do the analysis for you. In addition, we would like to think with you on how to implement the guidelines. A thorough approach is necessary, particularly for the manner in which the advisory and/or investment decision process should be amended.

For more information please contact Charco & Dique at 020-4165403 or send an e-mail to