Minimum content of suitability statements for retail clients

On 26 January this year, the FSMA published a communication on the "suitability statement". This communication is of relevance for regulated firms providing investment advice to retail clients as well as for firms managing retail client portfolios.

Through its communication, the FSMA intends to harmonise the content of the suitability statements. To this end, it lists the minimum content of these statements and provides examples of how to draft them.

Suitability statements must address two distinct aspects. First, they must contain the personalised recommendations issued by the regulated undertakings and, second, they must indicate how the recommendations were personalised (i.e. they must state the reasons why the regulated undertaking considered that the issued recommendations were in line with the personal characteristics of the retail client concerned). The main characteristics of retail clients to be taken into account include: their investment knowledge and experience (i.e. their understanding of the nature of financial instruments and their ability to assess the risks associated with certain financial instruments), their financial situation (e.g. the amount of their reserves and their ability to save monthly), their investment objectives (short/medium/long term), their risk tolerance (i.e. their ability to bear possible losses, their willingness to diversify their portfolio and the extent to which they want their invested capital to be protected) and any personal preferences (e.g. sustainable investment and ESG criteria). It therefore follows that suitability statements cannot merely consist of a general statement that the recommendations are in line with the personal characteristics of the retail clients, without a somewhat personalised analysis.

Case-based analysis does not necessarily preclude a standardised approach to justifying recommendations, provided that the profiles of the retail investors share common features. In the same vein, regulated firms may also base their justifications on their internal procedures for approving financial instruments and determining the target market as well as on their investment policies to the extent that such procedures and/or policies are in line with the retail client’s profile.

The FSMA requires justifications not only for investment recommendations but also when a regulated firm advises a retail client against making an investment. In the latter case of "negative" advice, the regulated firm must state how the retail client’s proposed transaction is inappropriate in terms of his/her personal characteristics, as well as the risks associated with executing the proposed transaction if the client decides to proceed with the investment.

The following is a summary of the minimum content that the FSMA requires in suitability statements:

• name of the regulated company and the person who provided the advice on behalf of the company (or automated the advice);
• name/number of the retail client;
• how the advice was communicated (e.g. via an agency);
• name of the initiator of the advice;
• duration of validity of the advice;
• date and time when the advice was issued and date and time of delivery of the suitability statement if not delivered at the same time as the advice;
• details of the content of the advice (see the communication for details);
• reasons to justify the suitability of the advice in relation to the personal characteristics of the retail client (see the communication for details);
• position of the retail client in relation to the target market: negative or positive;
• in the case of switching, details of the cost-benefit analysis;
• whether the adequacy of the advice may need to be periodically reassessed;
• whether the retail client's financial situation is incomplete;
• whether or not the advice is independent; and
• whether or not the suitability statement is provided as part of a periodic adequacy assessment.

Firms covered by this communication will have to ensure that they comply with it, given that the FSMA has indicated that it would verify compliance with the obligation to issue a suitability statement in the light of its communication.