Reminder of MiFID II conduct of business obligations in the context of increasing retail investor activity
The European Securities and Markets Authority (ESMA) has published a public statement about MiFID II obligations in the context of increasing retail investor activity.
ESMA reminds firms of their obligation to act honestly, fairly and professionally in accordance with the best interests of their clients when providing investment or ancillary services and to comply with all relevant MiFID II conduct of business and related organisational requirements. In particular, ESMA points to the product governance, information disclosure, suitability and appropriateness requirements.
As ESMA explains, firms must have adequate product governance arrangements in place to ensure that financial instruments will only be offered when in the interest of the client or potential client. Amongst others, firms must determine the target market and associated distribution strategy for the financial instruments that they manufacture or intend to offer.
Amongst others, firms must provide information on the financial instruments in which their clients or potential clients can invest. This information must include an appropriate description of the nature and risks of financial instruments to enable the client to take investment decisions on an informed basis. The description shall also explain whether the financial instrument is intended for retail or professional clients, taking account of the identified target market.
Finally, ESMA reminds firms of the suitability and appropriateness requirements. When providing investment advice or portfolio management, firms shall obtain the necessary information regarding the client’s or potential client’s knowledge and experience, his financial situation including his ability to bear losses, and his investment objectives including his risk tolerance to assess whether the financial instrument or service is suitable for the client. ESMA emphasises that firms should pay particular attention to the possible ramifications of the COVID-19 crisis for the client’s personal situation and the risk profile of his financial instruments to ensure that these financial instruments are suitable for him.