Investor Protection
Core Concepts
Investor protection rules aim to ensure fair treatment, transparency, and redress. Key concepts: client categorisation (retail, professional, eligible counterparty), best execution, product governance (target market, PRIIPs KID), complaints handling, and the Investor Compensation Fund. Candidates must know the rules on information disclosure (costs, risks), the right to cancel, and the role of the Financial Ombudsman. Traps often involve misclassifying clients (e.g., elective professional clients must meet quantitative and qualitative criteria), misunderstanding best execution (it is about best possible result, not necessarily best price), and overlooking the requirements for independent advice vs non-independent. Also, the rules on inducements (they must enhance service quality and be disclosed) and the ban on certain commissions for independent advice. Candidates should know the compensation fund limits (EUR 20,000) and the procedure for claims. Another trap: the distinction between execution-only and advised sales, and the documentation requirements.
Worked Example / Rule of Thumb
A retail client wants to invest in a complex product. The firm must provide a PRIIPs KID, assess suitability, and ensure the product is in the target market. Rule of thumb: if the product is complex, suitability assessment is mandatory; execution-only is not allowed.
Key Points
- Client categories: retail, professional, eligible counterparty; different levels of protection.
- Best execution: best possible result considering price, cost, speed, likelihood of execution and settlement.
- Product governance: identify target market and distribute accordingly.
- Inducements must enhance service quality and be disclosed; banned for independent advice.
- Investor Compensation Fund covers up to EUR 20,000.
- Complaints handled by firm first, then Financial Ombudsman.