SCA issues regulations on conduct of Suitability and Appropriateness Assessments

The Securities & Commodities Authority (“SCA”) has issued regulation No. 5/RM of 2020 (“Suitability Regulations”), which reinforces obligations placed on licensed institutions to ensure that products are recommended and /or instructions are executed for investors in accordance with prescribed suitability and appropriateness tests being conducted, taking into consideration complexities of financial products and knowledge, experience and capabilities of investors. The Suitability Regulations were issued on the 2nd February 2020 and will come into force 30 days after its publication in the Official Gazette.

The scope of the Suitability Regulations places additional obligations on licensed institutions contingent upon:

1. financial products being offered (e.g. Complex Financial Products, defined below),

2. the investors (non- qualified investors); and

3. type of financial activity (advisory and execution ).

While various regulations issued by SCA in relation to the conduct of financial services like investment management, financial consultancy and promotion of financial products do include language in relation to the conduct of suitability assessments by licensed financial institutions generally, the Suitability Regulations provide detailed information, objective criteria and thresholds, including documentary requirements that licensed financial institutions would be required to obtain from investors, frequency of assessments and record keeping requirements from an evidentiary perspective. An obligation is placed to ensure the investor is notified of tests conducted at regular intervals.

While Financial Products was defined as: Securities and Foreign Securities, the Complex Financial Products has been defined to mean financial products with features, terms and risks that are difficult to value and are not understood by a retail investor.

In our opinion, a due diligence is necessary to understand and identify the financial products that would be covered by this definition. Further, a confirmation that the remit of the Suitability Regulations is limited to services provided to non-qualified investors. The definition of qualified investors is identical to the definition provided in the recently issued SCA Board of Directors’ Decision No. (37/R.M) of 2019.

If the Suitability Regulations apply, some of the actions that licensed financial institutions would then be required to undertake are as follows:

1) Execution of Financial Product (excluding recommendation) – Appropriateness

  • Verify the appropriateness criteria;
  • Prepare the appropriateness report;
  • Notify the client of the outcome of the appropriateness report. If the report is negative, the licensed entity may still proceed with execution of the Financial Product provided it receives express instructions from the client.

2) Execution or recommendation of a Complex Financial Product - Suitability

  • Test the client’s experience, financial position and investment objectives;
  • Prepare suitability report;
  • Notify the client on the outcome of the suitability report. If the report is negative, the licensed entity may still proceed with execution or recommendation of the Complex Financial Product provided it receives express instructions from the client.

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