The Central Bank of Ireland has carried out a 'themed' review of the suitability-related processes at the investment firms it regulates. It has imposed "formal supervisory requirements" on firms that did not perform well. Vulnerability among HNW clients was of particular concern.

Suitability is the process by which firms take all reasonable steps to ensure that each client’s investments are in accordance with his investment objectives and personal circumstances. Boards are required to rigorously examine the way they handle suitability continually. Regulations issued in accordance with the European Union's second Markets in Financial Instruments Directive will make sweeping changes to the rules of suitability by placing a number of the European Securities and Markets Authority (ESMA) Suitability guidelines on a statutory footing and by introducing new requirements.

The review focused on the information-gathering phase of the suitability process and firms' co-operation with ESMA's guidelines. It found the following.

• Firms could not show the regulator that they were following suitability-related policies and procedures.
• Application forms did not contain fields for the collection of required information and/or were found to be incomplete.
• Not all firms could prove that they had effective "governance structures" and other things to help them achieve and assess suitability well. Some allowed clients to assess their own levels of knowledge and experience and their financial situations. They failed to counterbalance self-assessment with independent, objective assessments.
• Dependence on basic IT systems for the management of suitability processes was common and increased the likelihood of human error.
• Clear policies and procedures for the identification and safeguarding of vulnerable clients were absent or ineffective.

On this last subject, the regulator was pleased when it saw firms defining 'vulnerability' broadly, not restricting it to the onset of old age and taking into account clients' mental or physical abilities. It also approved of firms that assessed people for 'vulnerability' continually, noting that such things change over time. Vulnerable clients, it believes, ought to be accompanied to meetings by trusted third parties. It was also happy when it encountered firms training client-facing staff members to spot signs of vulnerability.

In cases where the Central Bank identified risks to consumers because of these failings, it says that it has imposed "formal supervisory requirements" on the recalcitrant firms.