Identifying Client Needs (Suitability And Appropriateness) Flashcards
What is the “assessment of suitability” and what information does the firm need to obtain in order to assess the client?
- Investment objectives, including risk tolerance.
- Financial situation, including ability to bear losses.
- Knowledge and experience relevant to the specific instrumental or service.
Explain the importance of the suitability assessment and when firm should undertake it
- Suitability assessment should be made when personal recommendations are made to the client to buy a financial instrument.
- Suitability assessment should also be taken for all decisions on whether to trade investments.
- This is vital when making a recommendation or taking a decision in the course of providing discretionary portfolio management services for the client.
What cannot be assumed with retail clients but can be assumed with professional clients or per se professional clients?
- Knowledge and experience can be assumed for products, services or transaction in respect to professional client, but the same cannot be assumed for retail clients.
- Can also be assumed that “per se” professional clients have the ability to financially bear investment risks consistent with the investment objectives - the same cannot be assumed with retail clients OR for retail clients that have opted to be professional clients.
A firm must give a suitability report (a document explaining why a recommendation is right for the client) in a durable format (like a printed or electronic document) if they provide personal financial advice to a retail client.
In what situations must a firm provide a suitability report in a durable medium to a retail client when giving a personal recommendation?
- Buys or sells shares in an investment fund that is regulated.
2 Buys or sells shares through a savings scheme linked to an investment trust.
- Makes changes to a personal or stakeholder pension, such as buying, selling, stopping payments, or withdrawing money.
- Takes income withdrawals from a short-term annuity (a type of retirement income plan).
- Transfers their pension or opts out of a pension scheme.
- Takes any action related to a life insurance policy, such as buying or changing it.
What are some other changes to the suitability rules that were introduced by MiFID II to enhance transparency and investor protection?
- Assessing Bundled Products –
A. If a firm gives advice on a package of products or services (like a bundle of investments) - they must check whether the whole package is suitable for the client, not just individual parts. - Automated Advice Responsibility –
A. If a firm uses an automated or partly automated system to assess suitability - they are responsible for ensuring that the recommendations are appropriate for the client. - Reliable Client Information –
A. Firms must make sure that the information they collect about clients (such as financial situation and investment goals) is accurate and trustworthy. - Keeping Client Information Updated –
A. If a firm provides ongoing investment advice or manages a client’s investments, they must regularly update the client’s information. - Regular Suitability Reports –
A. Firms that manage a client’s investments (discretionary management) must provide periodic reports to confirm that investments remain suitable. - No Recommendations for Unsuitable Investments –
A. If a firm determines that an investment or service is not suitable for a client, they must not recommend it or make trades on the client’s behalf. - Reviewing Investment Switches –
A. If a client is switching from one investment to another - the firm must collect information on the existing investment to compare costs and benefits before recommending the switch. - Periodic Suitability Reports Focus on Changes –
A. If a firm provides ongoing suitability assessments, their reports can focus only on any changes made, rather than repeating all previous information.
Briefly explain what “ consistent clients” are and how are these clients described under the FCA?
- These are clients who wish to proceed with a transaction against the advice of an investment firm.
- Under the FCA, client should be considered an insistent client where:
A. The firm has given the client a personal recommendation.
B. The client decides to enter into a transaction, which is different from the firm’s personal recommendation
C. The client wishes the firm to facilitate the transaction.
FCA has published guidance on dealing with insistent clients.
When a firm proceeded to execute a transaction for an insistent client, the firm should ensure communication is clear, fair and not misleading.
What information should the firm communicate to the insistent client?
- No Recommendation Given –
A. Tell the client that they are not recommending this transaction and that it goes against their professional advice. - Why It’s Not Recommended –
B. Explain why the transaction does not match the client’s needs or best interests. - Potential Risks –
A. Outline the risks involved in the transaction so the client fully understands what could go wrong. - Why the Firm Said No –
A. Firm must clearly state why they decided not to recommend this transaction, based on the client’s circumstances and the potential negative consequences. - The firm should keep a record of the advice and communication with the insistent client and acknowledgement from them to proceed to regardless.
Briefly explain what “churning” and “switching” mean
- Churning and switching relate to the deliberate over trading of client accounts for the purpose of generating commission.
Churning – when a firm keeps buying and selling investments (like shares) too often, without a good reason, just to make extra money from transaction fees.
Switching – when a firm moves clients’ money between different investment products (or within a packaged product) even though it’s not beneficial for the client, just to generate fees.
When does the “appropriateness obligation” come to play and what information should the firm ask from the client?
- Appropriateness should be tested when firms provide investment services OTHER THAN investment advice or discretionary portfolio management.
- Appropriateness test is typically for non-advised services.
A. Here no personal recommendation is provided by the firm.
B. The suitability rules do not apply. - Firm must ask the client to provide information about their knowledge and experience in the investment field specific to the type of product and services offered/ demanded.
- The firm can give the client a warning if the product demanded is assessed as inappropriate. (I.e. not suitable for them given their knowledge/ experience)
With regards to a professional client - is there any specific appropriateness obligation for them?
Personal clients can be assumed to possess the knowledge and experience necessary to understand the risks in relation to the products or services and question
When does the appropriateness obligation does not apply to a client?
It does not apply for clients dealing with non-complex financial instruments.
What is a non-complex financial instrument?
- Not a derivative - it’s straightforward and doesn’t have complicated pricing
- Easy to buy and sell - has a clear market
- Has a transparent price - its value is easy to find
- Does not require extra financial commitments beyond the purchase price.
- Has clear, publicly available information explaining how it works.
What constitutes of independent investment advice under the RDR (Retail Distribution Review)?
- Consider a broad range of investment options –
A. considering many different types of retail investment products, not just a limited selection. - Give fair and unbiased advice –
A. The firm must analyze the market properly and recommend what is truly best for the client, without any hidden influences. - Tell clients they are independent – A. Before offering advice, the firm must clearly inform clients that they provide independent investment advice.
What does the term “ retail investment product” mean?
- Introduced by the FCA and is wider than just traditional packaged products.
- It includes:
A. Structured investment products investments where returns depend on the performance of underlying assets, often with a fixed term.
B. All investment trusts – funds that pool money from investors to invest in a range of assets.
C. Unregulated collective investment schemes (UCIS) – investment funds that are not regulated by the FCA and may carry higher risks.
D. Other packaged investments – investment that gives exposure to financial assets but modifies the risk or returns compared to holding the asset directly (e.g., structured deposits or insurance-based investments).
What constitutes of restricted investment advice under the RDR (Retail Distribution Review)?
Restricted investment advice means that a firm does not consider all investment options available in the market.
Instead, it either:
1. Recommends products from only a few providers, or
- Only advises on certain types of investments (rather than the full range).
- Because of this, the firm must:
A. Clearly tell clients (both in writing and verbally) before giving advice that their recommendations are restricted.
B. Explain what the restriction is, so clients understand the limitations of the advice.
