Suitability and Conduct of Business
Core Concepts
Suitability and conduct rules ensure firms act honestly, fairly, and professionally. Key concepts: know-your-client (KYC), suitability assessment (knowledge, experience, financial situation, investment objectives), appropriateness (for non-advised services), and the distinction between execution-only and advised services. Candidates must understand the documentation requirements (suitability report), the rules on conflicts of interest, and the prohibition of misleading communications. Traps often involve confusing suitability (advised) with appropriateness (non-advised), misjudging the need for a suitability report when switching products, and overlooking the requirement to assess costs and risks. Also, the rules on financial promotions (fair, clear, not misleading) and the ban on guarantees of returns. Candidates should know the client's right to receive a suitability report before the transaction. Another trap: the treatment of professional clients (some conduct rules still apply) and the need to update client information.
Worked Example / Rule of Thumb
A client wants to buy a high-risk fund but has low risk tolerance. The adviser must not recommend it; if the client insists, the firm may execute only if it warns and documents the mismatch. Rule of thumb: suitability is about the client's best interests, not just their wishes.
Key Points
- Suitability assessment required for advised services; appropriateness for non-advised.
- KYC: knowledge, experience, financial situation, objectives.
- Suitability report must be provided before transaction.
- Financial promotions must be fair, clear, not misleading.
- Conflicts of interest must be identified, managed, and disclosed.
- Professional clients still benefit from some conduct rules (e.g., best execution).