BaFin

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Topic Consumer protection Suitability report: An important document for consumers

Date: 17.10.2018

Since the beginning of the year, retail clients have been given a statement on suitability, the “suitability report", after receiving investment advice. Banks and financial services institutions are required to issue these reports under the Markets in Financial Instruments Directive II (MiFID II) and the Act implementing it into German law, the Second Act Amending Financial Markets Regulations (Zweites Finanzmarktnovellierungsgesetz – 2nd FiMaNoG, see BaFin expert article from July 2017).

Definition:Financial instruments

In this context, financial instruments are investment products that are regulated by the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG, available in German only). These include e.g. funds, shares, certificates and bonds.

In the report, banks must outline in writing why the recommendation made – for example to buy or sell a financial instrument (see info box) – is right for the respective client, in other words why it is suitable.

But is this requirement really new? The suitability report will remind many clients of the investment advice minutes previously given to retail clients after receiving investment advice. Investment advice minutes have been abolished now that suitability reports have been introduced. This raises the question of what the difference between these two documents is. This article explains the information that must be included in the suitability report and why it is an important document for consumers.

Suitability report: what's new?

Statutory requirements governing the documentation of investment advice already existed in the past. The suitability report now takes over the important function of documenting the advice given and providing information to the client. What are the changes?

Certain formal requirements no longer apply since the introduction of suitability reports. For example, there is no requirement to describe the main points of the conversation in an investment advice consultation. In addition, the reason for and duration of the conversation no longer need to be documented, and the suitability report does not need to be signed by the adviser. It is only necessary for the date and time of the investment advice to be stated. Another key difference is that the suitability report does not need to be provided to the client without undue delay after the investment advice has been given. Now, the adviser must provide the client with the suitability report before the contract is entered into, in other words before the recommended financial instrument is bought or sold. This is of primary relevance to clients who receive advice in their homes. If the client does not receive the suitability report directly after the conversation with their adviser, the exact time it is furnished must be noted on the report.

Despite the relaxation of formal requirements, the suitability report is not a “light” version of the investment advice minutes. On the contrary: the respective purposes of the investment advice minutes and the suitability report are different. Whereas in the past the key content and course of the conversation had to be clearly documented for the client, the suitability report has to explain why the investment recommendation is appropriate for the client, thus making the outcome of the conversation clear to the client. Fewer formal requirements and greater flexibility in preparing the suitability report put the focus on informing the client about why a certain financial instrument was recommended to them. The client therefore only receives the information of greatest importance to them, namely information to assess the suitability of the recommendation.

Content and qualitative alignment

Investment advisers may only recommend financial instruments and investment services that are suitable for clients.

This means, first of all, that the financial instrument or service must be right for the client. Secondly, the client must be capable of understanding the workings and risks of the recommendation. For this purpose, the adviser must enquire about the client's knowledge and experience, their financial situation and investment objectives and assess the investment recommendation based on that information (see info box).

This assessment is presented for the client in writing in the suitability report. The report is therefore the written embodiment of the investment recommendation. It states the nature of the advice and explains how this aligns with the information about the client. All of the information required for the suitability assessment must be incorporated in the suitability report.

However, the suitability report does not merely contain a statement that a financial instrument is suitable. The legislation expressly requires it to also include the reasons why the financial instrument is suitable – in other words how the adviser has aligned the selection of the financial instruments with the client's wishes. To do this, the adviser must qualitatively align the features of the financial instrument with the information provided by the client.

Reasons that do not specifically refer to the information provided by the client are not sufficient, for example, the statement "the investment recommendation is appropriate because the investment is suitable for you". Why does a particular financial instrument correspond with the client's risk appetite? Why is the financial instrument specifically suited to the client for growing their wealth? The specific answers to these questions are critical for the client to be able to understand the recommendation and make a suitable investment decision.

Added value for the consumer

The suitability report and the specific reasoning for the recommendation contained therein essentially allow clients to take the investment adviser's expertise home with them. This means clients can review how the adviser aligned the investment recommendation with their circumstances, but there is another advantage too: the client can also look back later at how the recommendation came about. The suitability report therefore adds significant value for consumers.

At a glance:Good to know

1. When must the bank provide you with the suitability report?

The suitability report is supposed to enable you as a retail client to understand the reasons for the investment recommendation prior to entering into a contract, so that you can make a sound investment decision. For this reason it is necessary for you to receive the suitability report in good time. Details can be found in BaFin's circular on the Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency for Investment Services Enterprises (Rundschreiben der BaFin zu den Mindestanforderungen an die Compliance-Funktion und die weiteren Verhaltens-, Organisations- und Transparenzpflichten für Wertpapierdienstleistungsunternehmen – MaComp, available in German only). Specifically, this means:

  • The suitability report must be furnished to you before you buy or sell the financial instrument.
  • If the investment advice was given using a means of telecommunication – for example over the telephone – it is, by way of exception, sufficient if you receive the suitability report directly after entering into the contract. This is conditional upon you having agreed to this course of action and the bank having offered you the option of delaying the execution of the transaction. Previously, the client had the right under certain circumstances to withdraw from a transaction if the investment advice was given using a means of remote communication. This right of withdrawal no longer exists.

2. How must the bank convey the suitability report?

The bank may provide you with the suitability report in writing or electronically, for example by email. The latter is conditional upon you having agreed to this method of communication.

3. Can the client choose not to receive the suitability report?

It takes time to prepare a suitability report – both for the investment adviser and for you as the client. Nevertheless, you are legally required to receive the suitability report. Your investment adviser has a statutory obligation to provide you with a suitability report, and there are no exceptions. Remember: the suitability report is ultimately for your benefit. It allows you to identify and address inconsistencies with the information you provided and to understand the reasons for the investment recommendation. You can also refer to the documentation and the reasons for the recommendation set forth therein at a later point in time and if you seek advice subsequently. It is therefore a good investment of your time and is in your interests.

Authors

Andrea Löhr
BaFin Division for the Supervision of Compliance with Rules of Conduct and Investor Protection at Savings Banks & Cooperative Banks

Dr. Daniela Rothe
BaFin Division for the Supervision of Compliance with Rules of Conduct and Investor Protection at Private and Foreign Banks

Please note

This article reflects the situation at the time of publication and will not be updated subsequently. Please take note of the Standard Terms and Conditions of Use.

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