As part of its new supervisory strategy, the AMF is carrying out new types of inspection known as SPOT (Supervision des Pratiques Opérationnelle et Thématique - "operational and thematic supervision of practices"). It has now published a summary of five of these which it carried out at the beginning of the year. They concentrate on the gathering of information on clients, particularly regarding their knowledge and experience of investments, in respect of the rules set out in the European Union's first and second Markets in Financial Instruments Directives (MiFID I and MiFID II).
These inspections considered:
- the firms' procedures for new business relationships and the marketing of financial instruments;
- their procedures for gathering and updating information relating to HNW clients’ investment knowledge and experience; and
- the questionnaires they use to gather this information.
When MiFID II entered into force, the regulator found, these firms improved all their procedures. It noted the following good practices.
- The use of different questions for different categories of financial instrument, in order to validate clients’ relevant knowledge and experience. This good practice, which was implemented as a result of MiFID I by only one of the five firm, is now a requirement as a result of the modification of article L.533-13 of the French Monetary and Financial Code in its amended version after the entry into force of MiFID II. All the firms have now brought their procedures into compliance.
- The provision to the client of a questionnaire to probe his knowledge about the proposed financial product.
- The provision to the client of a document summarising how a complex or risky financial product works and the risks associated with it.
- The asking of questions about the number and average amounts of transactions realised and about the composition of the portfolio and its breakdown by type of product.
- Efforts to determinethe profile of the client, especially in relation to his responses to questions about his knowledge and experience of investments and his reaction in certain situations, for example when his investment becomes highly volatile.
- Regular updates of the "client knowledge and experience" questionnaire which pinpoint the client's assets, his liabilities, his income and his outgoings with respect to the firm (as well as other firms).
- Ensuring that the client’s preferred investment horizons correspond to the recommended holding period for the proposed financial instruments.
- A policy of warning the client that, if he refuses to divulge the amount of his assets he is holding at other firms , the advice being offered will be based only on the information available and that it might not be the best.
- A warning to the client that, if he refuses to divulge the amount of his liabilities with respect to other firms, the advice being offered will be based only on the information available and might not be the best - as long as the investment service provider ensures that the financial instrument is neither illiquid nor risky.
The regulator also spotted some bad practices.
- The practice of only allowing the client himself to assess his knowledge of investments.
- A choice of responses that does not provide for the client having no investment knowledge at all (e.g. Poor/Average/Good).
- The practice of asking the client to select his own profile through "self-assessment."
The regulator says that two firms have been breaking the rules. Each one modified a client's profile automatically when the client placed an order online that did not fall inside the parameters of his initial profile, doing so without re-assessing his knowledge and experience of investments and, moreover, without telling him about the consequences of such a modification.
The regulator is reminding firms that, with respect to their duty to provide advice, they must offer clients a suitable level of 'diversification' among their investments.
After completing these SPOT inspections, the AMF sent follow-up letters to the inspected firms, asking them to rectify all cases.
