The Central Bank of Ireland has published a Dear CEO letter outlining the findings of a review of investment firms’ compliance with the suitability requirements under MiFID II. The review was conducted as part of a Common Supervisory Action (CSA) coordinated by the European Securities and Markets Authority (ESMA).

The purpose of the review was to assess firms’ compliance with the suitability requirements under MiFID II by simultaneously conducting supervisory activities throughout the EU/EEA.

When providing investment advice and/or portfolio management, firms are required to take all reasonable steps to ensure that a client’s investments align to their objectives and personal circumstances. This is a key measure to protect investors from the risk of purchasing unsuitable products.

The review identified evidence of positive practices, particularly where firms took a personalised and comprehensive approach to suitability assessments for their clients. However, it also identified instances where further action is required by firms. For example:

• Firms need to take a more client focused approach, using tailored suitability assessments specific to their businesses and the needs and circumstances of their clients.
• Firms must improve their assessment of clients’ knowledge and experience, financial situation and investment objectives, particularly information relating to clients’ financial situation and their capacity to withstand losses.
• Firms must ensure suitability reports are sufficiently detailed and personalised to clients’ objectives and individual circumstances.

There is particular concern at the quality of firms’ oversight of cases where a client insists on proceeding with the transaction at their own initiative against the firm’s suitability advice. In such a case, clients should be clearly informed that the transaction is not considered by the firm to be suitable, including a clear explanation of the potential risks involved if the client proceeds.

In addition, the Central Bank is requiring all Irish authorised MiFID firms and credit institutions, who provide portfolio management and advisory services to retail clients, to conduct a thorough review of their individual sales practices and suitability arrangements. This review must be documented and must include details of actions taken to address findings in the ESMA public statement and this letter.

This review should be completed, and an action plan discussed and approved by the board of each firm, by end of Q1 2022.