Suitability Policy (the “Policy”)
The purpose of this document is to detail the policies and procedures that we must follow when collecting and assessing the information required to conduct a client suitability assessment, where the relationship management is maintained by the FUNDROCK Sales team.
This procedure covers both the requirements to carry out a suitability review prior to the commencement of the client’s investment mandate as well as an ongoing review (annually) to re-review the suitability factors and ensure that the product being provided to the clients is still suitable.
This policy document is limited only to where FUNDROCK provides Investment Services to professional clients.
The definition of Professional Clients which is applicable for both FRD and any Delegate is:
A Professional Client is a client FundRock or Delegate has assessed to possess the experience, knowledge and expertise to make its own investment decisions and properly assess the risks that it incurs.
There are two types of professional clients:
- Per se professionals;
- Opt-up professionals.
The following should be regarded as per se professional clients:
- Entities which are required to be authorised or regulated to operate in the financial markets. a) Credit institutions;
- Investment firms;
- Other authorised or regulated financial institutions;
- Insurance companies;
- Collective investment schemes and the management companies of such schemes;
- Pension funds and the management companies of such funds;
Opt-up professional clients
Clients other than those mentioned in the previous point, including private individual investors, may also be allowed to waive some of the protections afforded by the conduct of business rules by requesting to be treated as opt-up professionals. The client must state that it is aware of the consequences of losing the protections provided.
Under the Markets in Financial Instruments Directive 2014/65/EU (MiFID II) and its Delegated Regulation (eu) 2017/565 and ESMA guidelines on suitability (Suitability Guidelines), FundRock Distribution S.A. ("FundRock" or "we"/"our" as the content requires), as investment firm, when providing investment advice or retention and transmission of orders (RTO), is require to obtain the necessary information regarding the clients ‘ regarding the client’s or potential client’s knowledge and experience in the investment field relevant to the specific type of product or service, that person’s financial situation including his ability to bear losses, and his investment objectives including his risk tolerance and any sustainability preferences so as to enable the investment firm to recommend to the client or potential client the investment services and financial instruments that are suitable for him and in particular, are in accordance with his risk tolerance and ability to bear losses.
The requirement on FUNDROCK is to ensure that we have formally recorded onto our Salesforce CRM system at the point of establishment of a client relationship, and on an ongoing annual basis (or more regularly if required by relevant changes to the client's situation), the suitability of the product or services that are being provided.
FUNDROCK must be comfortable that the key areas set out in this policy have been assessed and evidence obtained to satisfy FUNDROCK that the client's circumstances and knowledge is such that the product or services are “suitable”. In particular, that the
- Investment Management services provided to the client take account of an appropriate degree of risk diversification and the sustainability preferences of the client;
- The financial situation of the client can finance the investments and the client can bear any possible losses resulting from the investments; and
- Any conflicts of interest are prevented from adversely affecting the quality of the suitability assessment (this is ensured through FUNDROCK’s separate conflict of interest policy).
When the investment service is delegated to a third party, FUNDROCK shall ensure that a similar process has been implemented within this third party.
In providing Investment Services, FUNDROCK is required to obtain sufficient information about the clients' 'knowledge and experience' in the relevant investment field, their financial situation and investment objectives including his/her suitability preferences in order that we can carry out a suitability assessment. We cannot provide Investment Services to a client unless we have obtained from the client such information as is necessary for us to undertake the suitability assessment. Note similarly, we cannot provide Investment Services to a client where having carried out a suitability assessment none of the services or instruments being considered is suitable for the client.
FundRock Distribution Sales team - Responsible for ensuring that FUNDROCK has carried out an initial assessment of suitability against the product or services being offered to the contacted client as well as at least an annual review and reassessment of the suitability criteria. A review may also be required due to a change of circumstances of the client at any point during the 12 months since the last suitability review or at such other intervals as may be deemed necessary given the client's risk profile.
The FRD Distribution Sales Team, is responsible for the client contact. The FRD Distribution Oversight assist as a 2nd line of defence.
In case a new FRD Sales Contact takes over a client relationship a new re-assement will be needed, which can involve the Client if deemed required.
Once the initial suitability review has been completed there is a requirement to provide a periodic communication to the clients detailing that the suitability review has been completed. This is addressed by means of at least a yearly review of the suitability documented in Salesforce by means of an account/product review with the client; and as agreed by the FUNDROCK Head of First Line compliance and FUNDROCK Risk officer.
The necessary evidence and sign off sheets should be retained within the client's files and could be subject to review by the FUNDROCK compliance monitoring team as well as FUNDROCK’s Internal and external auditors and regulator, the CSSF.
It will be the responsibility of the FUNDROCK Sales to ensure that a timetable of annual reviews is maintained and adhered to ensure ongoing compliance with the suitability requirements.
It will be the responsibility of the Compliance team to maintain these procedures and ensure that any updates to the regulations are duly captured and incorporated into the procedures, as well as providing any necessary training to the Sales staff.
When FUNDROCK delegates the investment services, FUNDROCK may rely on client information transmitted by the third party. However, FUNDROCK remains responsible for the completeness and accuracy of the information transmitted.
4.1. Client on-boarding
As part of the on-boarding of a client, to whom FUNDROCK will provide an Investment Service, FUNDROCK is required to conduct a suitability review. The investment mandate, on which FUNDROCK or its delegate is instructed, could be on a segregated asset basis or by exercising discretion over a range of pooled funds.
It is therefore critical that clients provide with complete and accurate information – while recognising the principal of proportionality due to the professional nature of the clients as well as the purpose for which the product might be choosen for (discretionary vs advisory mandates). Clients are obliged to inform FUNDROCK or FUNDROCK’s delegate of any change to their circumstances that may affect the accuracy of information provided and/or the suitability of our services to them. For this reason, FUNDROCK takes, where proportionate, reasonable steps to ensure the information collected about clients is accurate, reliable and consistent, by emphasising to clients the importance of providing complete and accurate information, and the impact that could have on our ability to offer them suitable investment services.
Notwithstanding the above, FUNDROCK is entitled to rely on information provided by clients unless FUNDROCK is aware or ought to be aware that such information is manifestly out of date, inaccurate or incomplete.
The scope of the suitability assessment varies depending on the specifics of the services being provided, and in particular on whether:
- the mandate refers to the client's entire portfolio or only part of it; and
- the investment strategy is set by the firm or the client. or its advisors
- the product or service rendered
- knowledge and experience in the investment field relevant to the specific type of financial instrument, insurance-based investment product or service;
- financial situation including his ability to bear losses; and
- investment objectives including his risk tolerance,
- Sustainabilibility preferences.
Client knowledge and experience
As all of these clients, subject to this policy, are deemed to have a client classification of professional, FUNDROCK is entitled to assume that such clients possess the necessary level of experience and knowledge to understand the risks involved in the management of their portfolios. FUNDROCK is not therefore required, as a matter of law, to obtain information from such clients on their knowledge and experience (article 54.3 MiFID Delegated Act EU 2017/565). Nonetheless, it is FUNDROCK policy to:
- retain on file and on Salesforce all notes from initial client meetings in which investment mandates are discussed (including the result of the suitability test, any warning given to the clients);
- record details of all external investment consultants or delegates that are advising clients; and
- to record details of any committee that may ultimately make a decision relating to FUNDROCK' or any delegate’s appointment, including its constitution and members/contributors.
- To record that all relevant investment material has been provided before the investment decision is made
When the investment services mentioned above are delegated to a third party, FUNDROCK shall ensure that the delegate comply with the MiFID rules and this process.
NOTE: - if a client has elected to be opted up to professional status e.g. a local authority pension fund, and if FUNDROCK is the investment adviser, we are not able to make the above assumption and we must ensure that the controllers of the contracted client do have sufficient “Knowledge and experience”
Client's financial situation and ability to bear losses
In understanding the client's financial situation and their ability to bear losses, FUNDROCK should ensure that the client has the ability to sustain any losses that may occur on the FUNDROCK recommended mandate. FUNDROCK must assess the client’s whole investment profile across all investment houses and not just the mandate being advised by FUNDROCK. We must also consider any regular income contributions that may be made by parent companies e.g. sponsor of pension funds. These aspects should refetc the noton of proportionality as well as the source of capital of the clients (advisory vs discretionary).
To assist with the above, FUNDROCK should aim where possible to record and retain evidence from the following areas:
- copy of the client's latest financial reports and accounts, in order to determine, where relevant, the client's source and extent of their regular income, assets, investments and regular financial commitments;
- If FUNDROCK or its third party delegate manages greater than 30% of the client's overall plan value (any losses or provision of investment strategy outside of the client’s expectations, could create a larger impact) and
- ensure that the entity can bear any losses that could be associated with the investment strategy we are providing to the client
- evidence that the person making the investment decision is duly authorised
FUNDROCK's risk assumptions, per strategy rating, are consistent with the respective fund KIIDs as follows:
- Low Risk strategies – Max 3% loss
- Medium Risk strategies - Max 6% loss
- High Risk strategies – Max 15% loss
- The expected Holding period is minimum 3 years
The client's (or the client’s representatives) knowledge and experience in investments includes information on the types of services, transactions and investment types with which the client is already familiar. The nature, volume and frequency of the client's transactions in investments and the period over which they have been carried out can assist in assessing their experience in particular where complex strategies or products are intended which may lead to increased risk. When the client is an institution and represented by individuals their relevant experience should be assessed, relative to the complexity of the products or services offered, and if a range of individuals with varying experience are representing the client then we can rely on the level of the most experienced who should discharge their duty or obligation to each other, unless there is clear evidence to the contrary.
Client's investment objectives
One of the main parts of the suitability review is related to the suitability of the investment mandate that is being provided by FUNDROCK or its delegate and its consistency with the client’s investment horizon, investment objectives, risk profile and risk preferences and her sustainability preferences.
To satisfy the above the following steps should be taken and areas covered and evidenced:
- Investment horizon: obtain where possible a copy of the client's investment strategy and ensure that the FUNDROCK mandate fits within the scope of the overall client investment strategy;
- Risk preference and profile: ensure that the FUNDROCK mandate is within the client's risk tolerance, we will need to assess the risk level of the strategy being offered (all FUNDROCK or its delegates investment strategies are considered Low or Medium, High risk);
- Sustainable investment preference: Ensure that the FUNDROCK mandate is within the client’s sustainable investment preference, we will need to assess the preference of the client related to “environmental, social and governance and require the client to position itself vis à vis the following:
- the minimum proportion that shall be invested in environmentally sustainable investments as defined in Article 2, point (1), of The Taxonomy Regulation (Regulation (EU) 2020/852 of the European Parliament and of the Council);
- the minimum proportion shall be invested in sustainable investments as defined in Article 2, point (17), of SFDR (Regulation (EU) 2019/2088 of the European Parliament and of the Council);
- whether or not to considers principal adverse impacts on sustainability factors and the qualitative or quantitative elements demonstrating that consideration are determined by the client or potential client.
NOTE: FundRock should explain the term and the distinction between the different elements of the definition of sustainability preferences under a) to c) and also between the funds/services without such sustainability features in a clear manner, avoiding technical language + explain what environmental, social and governance aspects mean.
- Purpose of investment: ensure that the FUNDROCK mandate is within the client's overall investment strategy. b.
if the client is advised by an external investment consultant on its overall investment strategy, we should record these details, however this cannot be relied upon in discharging our regulatory obligation;
- Change of circumstances: this will be applicable whenever there is a material (client) change of circumstances;
- Summary of client meetings/communications: this will only be applicable to annual reviews; and
- External advice provided: record and retain details of any external advisors that are advising the client on the overall investment strategy or any part of that.
NOTE :The client’s financial situation and cash flow should be understood as including but not limited to the client's regular income e.g. flows into a pension scheme. Client’s assets, including liquid assets, investments and real property and any material financial commitments or liabilities.
NOTE: The extent of the information required should be assessed and proportionate to the type of product, service or transactions to be entered into and the nature and sophistication of the client. We may assess that less information is required from a client on low risk, non-complex products (such as gilts) with the intention of investing a relatively small amount relative to their circumstances, than we would from a client interested in investing a large amount in complex structured derivative products where losses can be greater than the original commitment.
Any non-regulated investments should be considered carefully as to their suitability and the risks outlined to the client. FRD might required an additional waiver, to secure that clients have fully understand the risks and liquidity of such products. A non-regulated investment could include UCIS or crypto currency.
NOTE: FundRock or its delegated shall explain the term and the distinction between the different elements of the definition of sustainability preferences under a) to c) and also between these products and products without such sustainability features in a clear manner, avoiding technical language. Firms should also explain what environmental, social and governance aspects mean
4.2. RESULT OF THE SUITABILITY TEST
When providing the investment service of investment advice or rentation and transmission of orders, FUNDROCK or its delegates shall not recommend or decide to trade where none of the services or investment strategies are suitable for the client.
The investment firm shall explain to the client or potential clients the reasons for not doing so and keep records of those reasons.
FRD can decide to provide further training to the Client, to ensure that the risk is fully understood by the client. In this case a record of the training will be kept in Salesforce.
Where no investment strategy meets the sustainability preferences of the client or potential client, and the client decides to adapt his or her sustainability preferences, the investment firm shall keep records of the decision of the client, including the reasons for that decision. – This decision is only valid for the transaction per say.
4.3. ANNUAL REVIEW
The review should follow the same process as it was completed as part of the on-boarding suitability review; however it will also need to record any applicable changes that may have taken place with regard to the client financial and investment circumstances since the last review (on-boarding or last annual review) and record any items that are considered to be relevant.
Client’s annual review will be no later than 12 months from either the date of the commencement of the client relationship or the most recent annual review.
Members of staff are expected to encourage clients to update their information where there is a significant change to the client's situation. Updating of client information may be made during periodic client meetings. No member of staff should however take any steps to pressurise or induce a client to update his or her profile so as to change the client's risk profile, as per the Suitability Guidelines. We must inform clients whenever their provision of additional information results in a change to their risk-profile.
When FUNDROCK delegates the investment service to a third party, FUNDROCK shall ensure that its third party complies with the requirement above and provide the relevant information and document to FUNDROCK.
In case a new FRD Sales Contact during a review period takes over a client relationship, a new re-assement will be needed, which can involve the Client if deemed required.
4.4. RECORD KEEPING
FUNDROCK is required to maintain an adequate record of all relevant information about the suitability assessment and the periodic reports.
All of our suitability reviews, are subject to review and inspection by the CSSF and will therefore be required to be retained and easy to follow.
Client information should be recorded on a central log in Salesforce, which should detail the following:
- Name of the contracting client;
- Investment strategy;
- Inception date; and
- Next annual review date.
All evidence related to the suitability review should be retained in a Suitability folder within the relevant client correspondence file in the below directory as well as on the client’s Salesforce folder.
If no file has been established this should be added.
The files should be recorded with the date the suitability review is due e.g. 30th September 20**
This file should contain all updated documentation received from the client and all other information as may be deemed relevant for assessing the suitability of the investment mandate to the client’s circumstances.
All relevant client records should be retained for at least 5 years as requested by the CSSF.
When FUNDROCK delegates this task to a third party, FUNDROCK shall ensure that the document has been provided and shared to them.
4.5. SIGN OFF
To evidence the review has been completed and to ensure that all factors have been considered, a formal sign off form will be required to be completed for every suitability review, as detailed in “Appendix 1”.
This document will be required to have ALL sections completed for each review, be signed off by the Sales and co-signed by the head of Sales following peer review. Once the sheet has been completed along with the two names and dates of sign off, a copy should be retained within the clients’ Suitability folder, and a copy should be sent as an attachement to the Compliance team confirming approval of the form. This e-mail should be stored in the relevant client e-mail drive in the FundRock drive and Salesforce under the client.