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01 December 2011

Impact Red traffic light

High/medium impact: additional compliance obligations triggered when dealing with professional clients and execution only clients

Other areas to consider

Suitability; Best interests of clients; Liability; Risk disclosure

Current MiFID rules

Appropriateness obligation

When providing investment services (other than investment advice or portfolio management) a firm must ask its client or potential client to provide information regarding his knowledge and experience relevant to the specific type of product or service provided, so as to enable the firm to assess whether the service or product is appropriate for the client.

When assessing appropriateness, the firm must determine whether the client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or service provided.


Execution only: A firm is not required to ask its client to provide information or assess appropriateness if the service is “execution only” (e.g. it consists of execution and/or the reception and transmission of client orders), and certain other conditions are satisfied, including that the service relates to particular “non-complex financial instruments”.

Professional Clients: A firm when providing an investment service to a Professional Client is entitled to assume that for the products and services for which it is classified, the client has the necessary level of experience and knowledge.

ECPs: N/A.

MiFID Level 1 Directive Arts: 19(5), 19(6), 24(1)

MiFID Level 2 Directive Arts: 36, 37 and 38

FSA rules


Proposed changes
Draft Directive Recital (53)
Article 25

Execution only business

The Commission has modified the list of financial instruments in MiFID that are covered by the “execution only” regime and clarifies the types of shares, bonds, money market instruments, shares or units in a UCITS that are covered by the regime. These broadly speaking, exclude any of these types of financial instrument that embed a derivative or else contain a structure that makes it difficult for the client to understand the risk involved, which includes the provision of execution only services in conjunction with the granting of credits or loans to investors to allow them to carry out such a transaction.

ESMA is tasked with developing guidelines for the assessment of financial instruments that incorporate a structure that makes it difficult for the client to understand.

Professional Clients

The presumption that professional clients have the necessary level of experience and knowledge to be limited to less complex financial instruments in order to grant to professional clients a more rigorous assessment of suitability or appropriateness.

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