France’s financial markets regulator, the Autorité des Marchés Financiers (AMF), has identified compliance violations concerning the client suitability and appropriateness practices applied by some investment firms.
To stay on top of compliance, financial services operators have to gain insights into the financial situation of the client, including his investment knowledge, experience, and objectives. The genesis of these requirements lies in Markets in Financial Instruments Directive (MiFID II) regulation, which took effect in January 2018.
As a result of the AMF’s audits conducted at the beginning of 2018, several types of violations were found in three compliance areas. The following hierarchy of problems running from most common to least common was observed, according to the French watchdog:
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- Self-assessment only by the client of their own investment knowledge;
- Choice of responses that does not provide for the client having no investment knowledge at all (e.g., Poor/Average/Good);
- Asking the client to select their own profile via self-assessment;
The AMF also red-flagged breaches of regulations that were observed in two of the firms inspected.
Specifically, the violations cited by the regulator fell within the automatic modification of the client’s profile when they place orders that did not match the scope of their initial profile. The regulator says such modifications were made without re-assessing the client’s investment knowledge and experience, and without the client being informed of the consequences of this modification.
The report also noted good practices among the probed firms. The bulk of these supposed “best practices” border on the regular updates of the client knowledge and experience questionnaire, identifying the client’s assets, liabilities, income, and outgoings.
In concluding its report, AMF recommended a set of purported best compliance practices to address various concerns and mentioned some of the factors to determine if the firm is entitled to credit for cooperation. The regulator also said it had contacted the inspected firms requesting them to rectify compliance deficiencies in the area of the obligatory assessments to the suitability of its prospective clients.