The European Association of co-operative Banks (EACB) is pleased to participate to the ESMA’s Consultation paper on Guidelines on certain aspects of the MiFID II suitability requirements.
For co-operative banks the relationship between a bank and its customers is key, this meaning that all their operations are set to serve the customers’ interests. Clients can become members/owners of co-operative banks and a result, they have a direct say in the business and are involved in the governance, strategy and risk management processes. The core business of co-operative banks is value creation for their members and a long-term relationship of trust, opposed to the profit maximization approach of the mainstream banks. Member ownership leads to co-operative banks being predominantly focused on sustainable retail banking and key players in financing the real economy: the households and the SMEs on their territories.Moreover, local co-operative banks usually have a good physical proximity, thanks to their dense networks of branches. They are part of the community, understanding their customers and speaking their language.
For these reasons we attach great importance to the issue of suitability requirements, we welcome ESMA’s endeavours and we are happy to provide some feedback to certain aspects of the relevant consultation. Before responding to the specific consultation questions we would like to make some general comments regarding the draft Guidelines on certain aspects of the MiFID II suitability requirements as per below:
1. Principle of proportionality
The EACB welcomes that ESMA emphasises the need for proportionality, taking into account the nature and complexity of the financial instruments as well as firm’s different business models and their clients’ needs in the Consultation Paper.
However, we fear that ESMA does not always observe the principle of proportionality in the draft guidelines. For example, when requiring client information in the context of "know your customer principle" institutions may require only the information which is necessary and appropriate in individual cases to understand the client's circumstances. We believe that the nature of the service in some cases should enable firms to collect less information about the client. We elaborate on specific points of the guidelines where this is the case. In our responses to consultation questions below.
Another an example that in our view is not in line with the principle of proportionality relates to the obligation to obtain ‘the necessary information’ as set forth in article 25 paragraph 2 of MiFID II.
More in particular, we believe that firms should not be obligated “to encourage clients to disclose their financial investments they hold with other firms in detail, if possible also on an instrument-by-instrument basis” as proposed in paragraph 41 of guideline 3. Besides it will be difficult for investment firms to monitor on a continuing basis the reliability of this information, that may be subject to change on a daily basis. Hence whether firms need to ask such information should be up to the discretion of the firm itself, rather than imposing these requirements as sort of good practice.
2. Term robo-advice
In many points in the draft guidelines, ESMA refers to "robo-advice". At this point there is only very limited experience with robo-advice in Europe. The managed assets appear to be relatively small. In principle, the same requirements should apply to investment advice provided by a man or an application under MiFID II. This also follows from article 54 paragraph 1 of the MiFID II Delegated Regulation. For these reasons, we consider that special provisions on robo-advice in these guidelines are premature and would require a detailed and careful assessment.
Indeed, the ESAs have assessed quite recently inter alia in their Joint Committee Discussion Paper on automation in financial advice (JC 2015 080 4 December 2015) the potential benefits and risks of automation in financial advice. The ESAs have concluded to determine at a later stage which, if any, regulatory and/or supervisory actions may be required to mitigate the risks while at the same time harnessing the potential benefits.
In this context, the question arises whether or not a more fundamental view should be developed by the European legislator - at a higher legislative level – on how current investor protection rules in general, including suitability requirements, should be equally and proportionally be applied to robo-advice, rather than in these draft guidelines.
If nonetheless special rules for the "robo-advice were to be included, we would like to point out the following:
- The term "robo-advice" has not been defined uniformly throughout Europe. The definition used in the guidelines does not seem to allow us to distinguish between various types of services. It would be useful if there was a common clear understanding in Europe of which services are covered by the term "robo-advice" and which are not. Therefore, if specific provisions are included in the guidelines regarding robo-advice, we would encourage ESMA to provide a corresponding definition for robo-advice, in order to ensure a uniform implementation of the Guidelines in Europe.
- In our view digital tools, which are only designed as simple and objective search engines, should not fall under the definition of robo-advice under these Guidelines. A clarification in that regard would be desirable.
- Some draft guidelines clearly apply to robo-advice only. However, for some other guidelines, this is not always clear. We would therefore suggest that it is always made very clear which guidelines apply only to robo-advice.
3. Investor Protection Scope- Mission Statement
The draft guidelines seem to have been exclusively based on the idea of the "vulnerable client". However, there are also many competent and experienced investors who can reliably assess their actions and make informed and responsible investment decisions. We fear that this is not sufficiently taken into account and reflected in the draft guidelines. In order to alleviate this, we consider that the guidelines should provide guidance on the extent to which deviations are possible, for example, when it comes to experienced investors.
4. Relevancy with regard to professional clients
We understand that these guidelines principally address situations where services are provided to retail clients, but these guidelines should also be considered as applicable, to the extent that they are relevant, when services are provided to professional clients. With due regard to what is mentioned sub 3 of Annex III (Guidelines) it remains unclear to what extent these guidelines should be relevant when services are provided to professional clients.
Taking into account article 54 paragraph 3 of Commission Delegated Regulation 2017/ 565, we understand that banks can assume the necessary knowledge and expertise of professional clients, and in case of investment advice for per se professional clients the financial ability to bear any related investment risk consistent with the investment objectives of that client. Therefore the suitability assessment of professional clients will be focused on investment objectives of the client including client’s risk tolerance. Although the range of requirements and the nature of these clients is different, this consultation paper does not really give much attention (only in paragraph 38 and 39) to how suitability should be applied in relation to investment advice and portfolio management for professional clients. More in particular, when providing advisory services to professional clients, we believe that the financial position may be relevant for the purpose of assessing the investment objective (see paragraph 39), but not for the purpose of assessing whether the client is able to bear potential losses or not. Hence, obtaining such information serves another purpose.
A far more light touch and proportional approach should be possible in this situation without elaborated questionnaires to be filled in by the professional clients. This would need to be clarified in the draft Guidelines.
5. Information Overload
The draft guidelines create new information requirements for investors in many cases. We totally support that investors must be well informed in order to be able to make good investment decisions. However, it needs to be ensured that investors are not flooded with information in a way that they can no longer distinguish important from less important. For that purpose, the extent and detail of the information to be required should be carefully examined. Moreover, new information requirements should have legal basis. In our responses to the consultation questions below we identify some information requirements included in the draft guidelines which –in our view - are not necessary for a good investment decision by the investor and should be deleted.
We would like to stress that the timing of this consultation does not allow compliance with new or updated suitability guidelines as of the start of entering info force of MiFID II. European banks are still preparing themselves for the final stage of implementing MiFID II requirements and devoting enormous efforts on that. Furthermore, the close link with other MiFID II requirements such as product governance, costs disclosure and, knowledge and competence requirements shall make effective implementation of suitability requirements more complex and proper implementation would require more time. For these reasons, we would kindly ask ESMA to take this into account when defining the date of application of these guidelines.