How must an investment firm assess suitability for advice and portfolio management?

When it provides investment advice or portfolio management, a firm obtains the information it needs about the client's knowledge and experience of the relevant product or service, financial situation including ability to bear losses, and investment objectives including risk tolerance, so it can recommend services and instruments that are suitable. It tells the client, clearly and simply, that the purpose of the assessment is to let the firm act in the client's best interests, and it may not create any confusion about its own responsibility.

Financial situation includes the source and extent of regular income, assets such as cash and other liquid assets, investments and property, and regular financial commitments. Objectives include how long the client wants to hold the investment, risk preferences and tolerance, the purpose of the investment and, since 2 August 2022, any sustainability preferences. Knowledge and experience covers the services, transactions and instruments the client is familiar with, the nature, volume and frequency of past transactions and the period over which they took place, and the client's education and profession. The depth of information depends on the product: the more complex or risky it is, the more the firm needs, but the standard of suitability stays the same.

The firm may rely on what the client says unless it knows, or should know, that the information is clearly outdated, wrong or incomplete, and it must not discourage clients from providing information. For an ongoing relationship it keeps the information up to date, deciding which information is updated and how often according to risk, and updating when events make it necessary.

For a professional client the firm may assume the necessary knowledge and experience for the products, transactions and services covered by the client's professional classification. It may assume ability to bear the investment risks only for a per se professional client receiving investment advice. The client's objectives are never assumed.

Where the client is a legal person, a group of two or more individuals, or someone represented by another person, the firm needs a recorded policy on who is assessed. Normally the financial situation and objectives are those of the underlying client or legal person, and the knowledge and experience are those of the representative who acts. ESMA's guidelines add that for a group of individuals with no legal representative who cannot agree, the firm should take the most prudent approach, taking for each disputed point the least knowledge and experience, the weakest financial situation or the most conservative objectives, or decline the service.

If the firm does not obtain the information, it must not recommend services or instruments, and if nothing is suitable it must neither recommend nor decide to trade. Asking the client to confirm that a product is suitable does not move responsibility to the client, and the use of automated or semi-automated tools does not reduce the firm's responsibility. When advice or portfolio management involves switching investments, the firm analyses the costs and benefits and must be able to show the benefits outweigh the costs; since 28 February 2022 an advised client is also told whether they do.

Before the transaction, a retail client receives a suitability report on a durable medium outlining the advice and explaining how it fits the client's objectives, personal circumstances and investment term, knowledge and experience, attitude to risk, capacity for loss and, since 2 August 2022, sustainability preferences. If the agreement is concluded by distance communication that prevents the report being delivered in advance, the report may follow immediately after the client is bound, provided the client agreed to receive it without undue delay after the transaction and was offered the option of delaying the transaction to receive it first. A firm providing periodic suitability assessments reviews them at least annually, more often for riskier clients or instruments. Since 28 February 2022 the switching duties and the client reports under Article 26(6) of the Law apply to professional clients only if they tell the firm, on paper or electronically, that they want them; the firm keeps a record of that request.

When another investment firm instructs a CIF to provide services to that firm's client, the CIF may rely on the client information and any recommendations passed on. The instructing firm stays answerable for whether the information is complete and accurate and for whether its advice was suitable; the CIF receiving the instruction stays answerable for carrying out the service or transaction on that basis.