Advising and Selling Conduct
Domain 4 covers conduct of business across the client lifecycle: categorisation, disclosure, suitability, best execution, product governance, client assets and complaints.
Categorisation and protections
Clients are retail, professional (per se or elective) or eligible counterparties, with protections decreasing as category rises. Firms must tell clients their category and that they may request re-categorisation; elective professional status requires quantitative and qualitative tests. Professional status reduces, but does not remove, protection.
Suitability and appropriateness
A personal recommendation triggers a suitability assessment: knowledge and experience, financial situation, investment objectives, risk tolerance and capacity for loss, documented in a suitability report, with periodic review. Non-advised sales of complex products require an appropriateness test of knowledge and experience, with a warning if the product is not appropriate. Execution-only business is client-initiated and limited to non-complex products for retail clients; it removes suitability but not best execution, client money rules or the requirement for fair, clear and not misleading promotions.
Conflicts, inducements and costs
Conflicts must be identified, managed and disclosed only as a last resort. Inducements are prohibited unless they enhance the service and do not impair the firm's duty; minor non-monetary benefits may be acceptable if disclosed. MiFID II requires ex-ante and ex-post disclosure of costs and charges.
Product governance and financial promotions
Manufacturers and distributors must define a target market, test the product against it and review it. Promotions must be fair, clear and not misleading, and approved by an authorised firm. Client money must be segregated and reconciled; complaints must be handled promptly, with ombudsman referral rights and root-cause analysis fed back into the business.
Worked example
A 70-year-old retiree with modest savings is sold a ten-year structured product with 40% capital risk on an execution-only basis. The product is complex, so execution-only is unavailable to a retail client; an appropriateness test should have blocked the sale; no suitability assessment was done; the promotion must have made the capital risk clear and prominent. The firm bears the burden of showing it acted fairly, and the likely outcomes are an upheld complaint, redress and a supervisory notification.
Traps that cost marks
Thinking professional clients have no protection; confusing suitability with appropriateness; believing execution-only removes all obligations; forgetting ex-post costs disclosure; treating disclosure as enough to cure a conflict.