Extensive changes to client suitability requirements, which would take into account a client’s professional and educational background as we...

Extensive changes to client suitability requirements, which would take into account a client’s professional and educational background as well as their familiarity with financial instruments and markets, have been proposed by European legislators who are looking into changes to the Markets in Financial Instruments Directive (MiFiD) – formerly known as the Investment Services Directive. The Committee for European Securities Regulators, which is a committee made up of ministers and officials reporting to the European Parliament, has suggested a series of proposals which would clarify European conduct of business rules and the definition of investment advice. The latest release of the European Securities Committee proposes changes to the assessment of client suitability and appropriateness parts of the MiFiD which will require advisers to ensure a client “has the necessary experience and knowledge in order to understand the risks involved” in a financial transaction. It suggests that the client’s level of education and profession, past and present should be included. Proof of the client’s knowledge of financial instruments would also be required, with a log of “the nature, volume, frequency of the client’s transactions in financial instruments and the period over which they have been carried out along with “the types of services, transactions and financial instruments with which the client is familiar”. These suitability requirements on investment advisers would be substantially more onerous than current proposed requirements which are due to be implemented from October 2006. The UK's Association of British Insurers has pointed out that the suitability requirements may also cover insurance-based advisers and that the implication of the proposals is that only investors with experience of investing in equities and with higher education or professional occupations can be sold financial products. It also contradicts the CESR’s previous proposals that suitability requirements should be proportionate to the risk profile of the product or instrument.