The Cyprus Securities and Exchange Commission (CySEC) has issued Circular C504 informing Regulated Entities (i.e., CIFs and AIFMs) on the publication of Guidelines on certain aspect of the MiFID II appropriateness and execution-only requirements that were issued by European Securities and Markets Authority (ESMA) on April 14, 2022.
| Guideline no. | Important requirement | Legal Framework |
| INFORMATION TO CLIENTS ABOUT THE PURPOSE OF THE APPROPRIATENESS ASSESSMENT AND ABOUT EXECUTION-ONLY | ||
| Guideline 1 | Firms should, in good time before the provision of non-advised services, inform their clients, by using clear and simple language, about the appropriateness assessment and its purpose which is to enable the firm to act in the client’s best interest. | (Article 24(1), 24(4), 24(5), 25(3) and 25(4) of MiFID II) |
| KNOW YOUR CLIENT AND KNOW YOUR PRODUCT | ||
| Guideline 2 – Arrangements necessary to understand clients | Firms’ policies and procedures should aim to enable firms to collect all information necessary to conduct the appropriateness assessment in relation to the specific product types offered or demanded | (Articles 16(2) and 25(3) of MiFID II and Article 55 of the Delegated Regulation) |
| Guideline 3 – Extent of information to be collected from clients (proportionality) | In determining the extent of the information to be asked about the client’s or potential client’s knowledge and experience, firms should take into account the type and characteristics of the investment products or services to be considered (i.e., the level of complexity and risk of the investment products or services) and the nature of the client | (Article 25(3) of MiFID II and Article 55 of the Delegated Regulation) |
| Guideline 4 – Reliability of client information | Firms should take reasonable steps and have appropriate tools to ensure that the information provided by their clients is reliable and consistent, without unduly relying on clients’ self-assessment | (Article 25(3) of MiFID II and Article 55(3) of the Delegated Regulation) |
| Guideline 5 – Relying on up-to-date client information | When firms rely on previously collected information on clients’ knowledge and experience, firms should establish procedures defining the frequency of updating such information in order to ensure that the information remains up to date and is accurate and complete for the purpose of the appropriateness assessment | (Articles 16(2) and 25(3) of MiFID II and Article 55(3) of the MiFID II Delegated Regulation) |
| Guideline 6 – Client information for legal entities or groups | Firms should have a policy defining on an ex-ante basis how to conduct the appropriateness assessment in situations where a client is a legal person or a group of two or more natural persons or where one or more natural persons are represented by another natural person. Such a policy should be drafted in accordance with the general guideline 6 and supporting guidelines enshrined in ESMA Guidelines on certain aspects of the MiFID II suitability requirements | (Articles 16(2) and 25(3) of MiFID II) |
| Guideline 7 – Arrangements necessary to understand investment products | Firms should ensure that policies and procedures are implemented to understand the characteristics, nature, and features of investment products in order to allow them to assess if such products are appropriate to their clients | (Articles 16(2) and 25(3) of MiFID II) |
| MATCHING CLIENTS WITH APPROPRIATE PRODUCTS | ||
| Guideline 8 – Arrangements necessary to ensure a consistent appropriateness assessment | In order to assess whether an investment service or product envisaged is appropriate for the client, firms should establish policies and procedures to ensure that they consistently take into account:
· all information obtained about the client’s knowledge and experience necessary to assess whether an investment product is appropriate; · all relevant characteristics and risks of the investment products considered in the appropriateness assessment. Firms should establish policies and procedures enabling them to issue a clear and not misleading warning in case they consider that the investment service or product is not appropriate for the client or potential client |
(Articles 16(2) and 25(3) of MiFID II and Articles 21 and 56(1) of the Delegated Regulation) |
| Guideline 9 – Effectiveness of warnings | To ensure its effectiveness, the warning issued by firms in case no or insufficient information is provided by the client on his/her knowledge or experience, or in case the assessment of such information shows that the investment service or product offered or demanded is not appropriate for the client, must be prominent, clear, and not misleading | (Article 25(3) of MiFID II and Article 56(2) of the Delegated Regulation) |
| OTHER RELATED REQUIREMENTS | ||
| Guideline 10 – Qualifications of firm staff | Staff involved in the appropriateness assessment should understand the role they play in this assessment and have an adequate level of skills, knowledge, and expertise, including sufficient knowledge of the relevant regulatory requirements and procedures in order to discharge their responsibilities. To that end, firms should regularly train their staff | (Articles 16(2) and 25(3) of MiFID II and Article 21(1)(d) of the Delegated Regulation) |
| Guideline 11 – Record-keeping | As part of their obligation to maintain records of the appropriateness assessment referred to in Article 56(2) of the MiFID II Delegated Regulation, firms should at least:
· maintain adequate recording and retention arrangements to ensure orderly and transparent record-keeping regarding the appropriateness assessment, including the collection of information from the client and the non-advised service provided; · ensure that record-keeping arrangements are designed to enable the detection of failures regarding the appropriateness assessment; · ensure that records kept are accessible for the relevant persons in the firm and for competent authorities; · have adequate processes to mitigate any shortcomings or limitations of the record-keeping arrangements. |
(Articles 16(6), 16(7), 25(5) and 25(6) of MiFID II and Articles 56(2) and 72 and 76 of the Delegated Regulation) |
| Guideline 12 – Determining situations where the appropriateness assessment is required | Firms should adopt appropriate arrangements to ensure that they are able to determine situations where an appropriateness assessment needs to be performed and avoid performing one in situations where a suitability assessment needs to be performed | (Articles 16(2), 25(3) and 25(4) of MiFID II and Article 57 of the Delegated Regulation) |
| Guideline 13 – Controls | Firms should have appropriate monitoring arrangements and controls in place to ensure compliance with the appropriateness requirements | (Articles 16(2), the second subparagraph of 16(5) and 25(3) of MiFID II and 76 of the Delegated Regulation) |
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