Online Platforms: "Walking" the line between legal and financial services compliance (Part 3 of 5)

As set out in article 53 Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”), investment advice provided by a person in their capacity as an investor or potential investor on the merits of buying or selling (or subscribing to) an investment product which is suitable to the person to whom it is made and is not otherwise issued exclusively to the public.

In contrast, firms providing “information”, such as statements of fact or figures relating to an investment, are not usually providing investment advice or making personal recommendations under article 53 RAO (and therefore would not be required to carry out a suitability assessment). Many online platforms provide information, rather than a giving investment advice or personal recommendations, and so are unlikely to be caught by article 53 RAO.

Most firms that provide investment advice fall within the scope of MiFID II and so are required to assess suitability pursuant to article 54 MiFID Org Reg. These firms must consider whether an investment service or product is suitable for a customer, taking into consideration:

1. the customer’s investment objectives, including risk tolerance;
2. whether the customer can financially bear the risks consistent with their investment objectives; and
3. whether the customer has sufficient knowledge and experience to understand the risks involved in a transaction.

Where an investment service is provided to a professional client, the provider is entitled to assume point (3) above. Similarly, where that service consists of providing investment advice to a professional client the provider shall also be entitled to assume point (2) above.

Online platforms commonly meet suitability obligations by:

• using the registration process as a “virtual filter” by asking customers to complete a questionnaire;
• categorising clients at registration by factors such as their risk tolerance;
• using the “virtual filter” to allow customers to only view investments suitable to them;
• preventing customers from registering if the products on the platform are unsuitable;
• creating a “tick box” for persons who wish to “opt-up” to being considered a professional client;
• automatically generating reports for suitability decisions taken and sending the report to clients where appropriate; and
• automatically creating a record of all suitability assessments.

Moreover, as set out in guidance by the European Securities and Markets Authority (“ESMA”), firms relying on questionnaires and risk-profiling software are still required to create internal controls and review mechanisms to ensure the tools are satisfactory and fit for purpose.

The FCA is expected to be carrying out a review into assessing suitability in 2019, following on from its 2017 (pre-MiFID) review. As such, suitability assessments may be under increased scrutiny.

Appropriateness assessment obligations

An operator of an online platform providing non-advised, execution only investment services, will need to assess if the products in question are appropriate to its clients. This involves determining whether a client has the necessary knowledge and experience to understand the risks involved in certain product(s) or investment service(s). If a product is not considered appropriate for a client, that client must be sent a warning notice.

Similar to the suitability requirements, firms are entitled to assume professional clients (including those who “opt up” to professional client status) have met the experience and knowledge requirement for appropriateness assessments.

Operators of online platforms commonly implement similar measures to assess appropriateness as outlined above in relation to firms that assess suitability.

As published in Butterworths Journal of International Banking & Financial Law, June 2019.

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