Documenting execution-only cases
“Clear and credible” evidence is needed for execution only sales. This should detail that the client:
- is aware the transaction is execution only;
- has not asked for, or received, advice;
- it is their decision alone to take out the investment; and
- the firm is taking no responsibility for the product’s suitability.
The client instruction should be in writing and must include ALL aspects relating to the transaction, sufficient for the firm to actually implement the instruction. ‘All aspects’ means exactly that – the client instruction must explicitly state which product type, provider, amount, fund etc. is required.
Any input from the firm would mean that the entire transaction would, in fact, be advised business. There is no hybrid approach in this area.
It is prudent to consider that any transaction for an existing client is unlikely to meet the definition of execution only. Previous discussions with the client could be deemed to have influenced the client, even where those discussions may not have been recent – the FOS has found against firms on this basis.
Whether business is advised or Execution Only is determined by facts rather than by a statement from the client that they want to proceed on an Execution Only basis. A client may state that they do not require advice, but the existence of a prior relationship is likely to mean that advice has already been given that may have a bearing on any execution only request.
In non-advised sales, you do not make any personal recommendation, but merely provide generic information and leave the client to decide how they wish to proceed. For example, providing generic information recommending your client should buy household contents insurance (without mentioning a specific insurer or policy) that is unconnected with the sale of a contract would not be an advised sale. People making non-advised sales should avoid answering questions in a way that could inadvertently give advice. Answering questions such as ‘what do you think?’, or ‘which one is best?’ could involve making a personal recommendation and therefore become an advised sale.
Complex Financial Instruments
There is no formal definition of complex financial instrument. The implied definition is that it is any instrument that does not meet the criteria for a non-complex instrument.
MiFID II widened the scope of complex products, listed the financial instruments that are covered by the “execution-only” regime and clarified the types of shares, bonds, money market instruments, shares or units in a UCITS that are covered by the regime. These broadly speaking, exclude any of the types of financial instrument that embed a derivative or else contain a structure that makes it difficult for a client to understand the risk involved.
MiFID introduced an “appropriateness” test for non-advised sales, with MiFID II narrowing the scope of investments that can be classified as ‘non-complex’. This means that the firms must ask clients for information to help it decide whether the client has the “necessary knowledge and experience” to understand the risks involved in the specific type of product or service provided. This means that in addition to being absolutely clear with the client that they do not need, and are not receiving any advice, firms must also ensure they are confident that the client is sophisticated enough to make their own decisions and have assessed that the service or product is appropriate for the client.
If challenged, a client who is deemed not to have the necessary “knowledge and experience” may render any agreement signed by the client useless in the firm’s defence and they could find themselves liable for having given ‘advice’.
Execution only: A firm is not required to ask its client to provide information or assess appropriateness if the service is “execution only” (e.g. it consists of execution and/or the reception and transmission of client orders), and certain other conditions are satisfied, including that the service relates to particular “non-complex financial instruments”.
Professional Clients: A firm when providing an investment service to a Professional Client is entitled to assume that for the products and services for which it is classified, the client has the necessary level of experience and knowledge.
See over for our view and suggested action.