On 21 March, the EACB submitted its response to the European Commission’s consultation on options to enhance the suitability and appropriateness assessments currently required under MiFID II and IDD, which has been proposed with the rationale of addressing concerns of complexity and comparability in the related processes and documentation.
Whilst clients of EACB members have noted that the suitability assessment has presented information overload issues (lengthiness and complexity of the questionnaires particularly when investment amounts are small, or taking place too frequently), they have not provided any negative feedback on the present suitability framework as brought up by the Commission in their consultation. Therefore, it would seem more appropriate to call for simplification and more flexibility in the amount of topics to be addressed in, and the frequency of, undertaking the suitability test, rather than for a complete overhaul of the present suitability framework.
As for comparability, we understand that the Commission’s proposal for a “personalized asset allocation strategy” is an extension of the Open Finance framework under the EU’s Digital Finance Agenda, in order to introduce the option of transferability or portability of the investor portfolio between intermediaries. However, a separate consultation phase is currently underway to re-assess the technical integration of ESG characteristics and preferences in the suitability and appropriateness assessments considering the urgent climate goals under the Paris Agreement. It would thus logically make more sense to address such assessments from the point of view of the EU’s sustainability agenda first before even considering any new suitability framework integrating machine readability.
We must overall consider:-
• Lessons learned from PRIIPs: Experience with the PRIIPs regime has shown that it is very difficult to build standardized requirements on client profiling for a wide range of financial instruments falling under MiFID. In addition to “classic” investment products (funds, bonds, shares etc.) these requirements would also apply to over-the-counter derivatives, the latter of which are very difficult to standardize. Furthermore, there is the risk to end up with customers receiving information sheets with confusing content as is the case under PRIIPs. The fact that the tax regimes, pension, and social security systems differ widely across Europe will only add to that complexity.
• Consumer choice and competitiveness: The Commission proposal intends to focus more on the client’s specific investment needs, but the transition from a “product approach” to a “personal investment plan” by way of common standards would have the opposite intended effect. It would also complicate the process for retail clients who benefit from simplified processes by way of execution only or RTO services. In such cases clients may have to follow a suitability test when they would previously have been subject to an appropriateness test for non-advised services. There is no perceived added value for the retail clients in this case, and also for the investment service providers because their distinction by product offer or value-added in the advice or other services provided would be inhibited.
• Risks and costs of transferability: We find it seriously dangerous for a provider to make recommendations that are based on the third-party recommendations. There are different product offers, market analyses, market data sets etc. between intermediaries and so it is highly likely that an intermediary would perform the suitability assessment again rather than incorporate the original assessment. This is not to mention GDPR limitations that may arise from data transferability. Therefore, we do not envisage cost savings in this aspect but rather that further fees would be incurred by retail investors due to the additional assessments. Moreover, it is unclear how liability risk would be addressed in case there are issues with the original assessment in a portable setting.
The EACB would thus require more substantive evidence from the European Commission that the benefits outweigh the costs, in order to be able to support any proposals for a new suitability and appropriateness framework. For more detailed information, please download our position paper.