The European Securities and Markets Authority (Esma) is seeking feedback from market participants on draft guidelines specifying criteria for the assessment of knowledge and competence of natural persons in investment firms that provide investment advice or information about financial instruments, investment services or ancillary services to clients.
The consultation paper (CP) proposes that such criteria should be met by attaining an “appropriate qualification” and “appropriate experience” and sets out the areas of knowledge and competence that need to be assessed against to provide investment advice or information to clients in relation to financial instruments and structured deposits as defined in the Markets in Financial Instruments Directive (Mifid II).
“Under the current Mifid framework, investment firms must ensure that their personnel have the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them,” stated Esma’s consultation report. “This implies, for example, the obligation for investment advisers acting on behalf of a firm to know the characteristics of the products they offer in order to give a personal recommendation to clients and comply with the suitability requirements.”
Given the complexity of investment products and continuous innovation in their design, it is necessary that staff who give investment advice or information about financial instruments, structured deposits, investment services or ancillary services to clients, on behalf of the investment firm, possess an appropriate level of knowledge and competence in relation to the products offered, stated Esma.
“Investment firms should allow their staff sufficient time and resources to achieve that knowledge and competence and to apply it when providing services to clients,” it said
These areas include investors understanding the key characteristics, complexity, and total costs of relevant products or services; how the market functions, the market structure and the impact of economic data; how to use relevant data sources and valuation principles; and the relevant regulatory requirements as well as the firm’s internal procedures designed to ensure compliance with Mifid II.
Under the new Mifid rules, staff giving information about investment products will be required to understand the key characteristics, risk and features of the investment products available through the firm, including any general tax implications and costs to be incurred by the client in the context of transactions; understand the total amount of costs to be incurred by the client in context of transactions in an investment product; and understand the characteristics and scope of investment services or ancillary services.
“Particular care should be taken when giving information with respect to products characterised by higher levels of complexity,” stated Esma.
The CP also proposes that national competent authorities or other appropriate bodies should determine the list of appropriate qualifications or criteria for the assessment of qualifications.
“Competent authorities or other national bodies identified in the member state shall publish a list of the appropriate qualifications that they consider meets the requirements of the guidelines or the criteria required to attain an 'appropriate qualification' and the requirements of the 'appropriate experience' to be attained by staff in investment firms giving investment advice to clients and by staff giving information about investment products, investment services or ancillary services to clients,” stated Esma. “The level and intensity of knowledge and competence expected for those providing investment advice should be of a higher standard than those that only give information on investment products and services.”
These guidelines, said Esma, are intended to enhance investor protection by setting out the standards required to be held by staff in investment firms that provide investment advice or information to clients, and requiring the review and assessment of how such staff meet these standards.
The consultation will be open until july 10. Esma expects to publish final guidelines in the last quarter of this year.
Click here to read the consultation paper.
Related stories:
FCA seeks feedback on Mifid II implementation
Esma seeks responses on complexity definition
Esma points to falling SP sales, warns of smart beta strategies