The National Securities Exchange Commission ("CNMV") has published a new Circular developing and detailing the manner in which financial institutions must comply with the obligations set forth in the Securities Market Law applicable to financial institutions when evaluating the appropriateness and suitability of financial instruments.
The Circular applies to Spanish entities providing investment services, Spanish branches of foreign investment services firms, EU entities rendering investment services in Spain under the freedom to provide services regime by means of an agent and non EU foreign entities operating in Spain under the freedom to provide services regime.
The Circular will enter into force on 19 August 2013, two months after its publication in Spain’s Official State Gazette.
1. Suitability test
When assessing the suitability of providing investment advice services to
clients, financial institutions must provide a description in writing or in any
other durable medium justifying the appropriateness of the recommendation in
view of the characteristics and objectives of the investor.
The recommendation must be consistent with all aspects pertaining to the
client that are assessed and the description must at least include the terms
according to which it has classified the investment product or service from the
perspective of market, credit and liquidity risks and complexity, as well as a
suitability assessment on these three components.
The entity must demonstrate compliance with this obligation either by
requesting a copy of the submission signed by the client indicating the delivery
date, by recording or registering the client communication through electronic
means or by any other reliable means.
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2. Appropriateness test
Entities that assess the knowledge and experience of clients when providing
investment services other than investment advice or portfolio management
services must provide the client with a copy of the document containing the
evaluation.
The evaluation must be consistent with all the information provided by the
client as well as any information that was available to the entity and used in
the evaluation. This documentation must be submitted each time an assessment is
made of a specific product or family of products.
The entity must corroborate its compliance with the reporting obligation, in
the same manner as previously indicated, in order to assess the suitability.
When the evaluation cannot be performed due to insufficient information from
the client, the entity must warn the client that this insufficiency prevents the
entity from determining whether or not the investment service or product is
appropriate for the client.
The Circular also establishes that when the transaction is performed through
a complex instrument, the entity must obtain the client’s signature along with a
handwritten statement acknowledging that the instrument is a complex product and
a lack of information makes it impossible to evaluate its appropriateness.
If, after making the assessment, the financial institution considers that the
service or product is not suitable for the client, the entity must warn the
customer of that conclusion and obtain the client’s signature on a cautionary
notice as well as a handwritten statement from the client acknowledging that the
product is complex and is not considered suitable.
The cautionary notice and handwritten statements will form part of the
transaction’s contractual documentation even if formalized in a document
separate from the purchase order.
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3. Creation of a registry of evaluated clients and
unsuitable products
The Circular requires that entities maintain an updated registry of evaluated
clients and unsuitable products that reflects, for each client, products which
were previously evaluated as inappropriate.
The registry, which will form part of the record on clients, must be
maintained by computerized means that prevent the manipulation of the
information while allowing for swift consultations.
The registry must be operational (and in accordance with the terms stipulated
in the Circular) in November 2013, i.e., within three months as from the
entrance into force of the Circular.
4. Assessment for services performed electronically or by
telephone
The Circular also provides that, when investment services are rendered
electronically or by telephone, the financial entities must collect the same
information from clients. The information may be obtained by electronic means or
by telephone provided that effective measures are implemented to prevent the
manipulation of the information following completion of the transaction.
If the services are rendered by telephone, the financial entity must keep the
recording with the client's verbal consent. The recording must be made available
to the client upon request.
If the services are rendered by electronic means, the entity must use the
means necessary to ensure that the evaluation is performed prior to processing
the order and the entity must be capable of evidencing that circumstance.
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1.
Suitability test