Since the European Union has issued guidelines and directives on markets for financial instruments (MiFID, i.e. Markets in Financial Instruments Directive) regulators and banks are challenged. All, financial market supervisory authorities, consumer protection organizations as well as banks are obliged to protect clients and assume responsibility for their investment advice.
To ensure product eligibility, product suitability, appropriateness and best execution of client orders appropriate procedures and processes have to be developed, to meet all regulatory, supervisory and tax bearings.
To ensure product eligibility, product suitability, appropriateness and best execution of client orders appropriate procedures and processes have to be developed, to meet all regulatory, supervisory and tax bearings.
- First, banks are required to categorize each client as either "Suitable", "Professional" or "Nonprofessional".
- Second, product eligibility authorizes the bank to offer a product range or specific product to a client. Eligibility is determines using information like age, residence and / or nationality.
- Third, via product suitability, i.e. the Suitability Test (financial circumstances, investment objectives, knowledge and experience in capital markets) the client’s adequate product range is defined.
- Fourth, before accepting or transmitting a client’s order the bank must determine whether the transaction is adequate and appropriate or whether any tolerance limit of a defined risk profile is compromised if the transaction would be executed.
- Fifth, the contractor is obliged to act in the best interest of the client and to advocate best execution of any submitted client order not only in terms of price but also quality, quantity and time.
- Sixth, the documentation and information obligation dictates that client relations as well as consultations must be appropriately, comprehensibly and transparently documented.
