Code of conduct for providers of investment services on client classification, disclosure requirement and obligation to obtain information
1. Background for client classification
According to the Finnish Securities Markets Act, securities dealers (below referred to as service providers collectively with other providers of investment services) are required to inform their clients about the clients’ classification into non-professionals, professionals or eligible counterparties. Clients are classified as provided in the Securities Markets Act, which contains detailed provisions of factors which have an impact on the classification. Client classification affects the extent of investor protection and application of this code of conduct.
Professional clients are required to inform their service provider about any changes that may have an impact on client classification
2. Reclassification as client
The client is entitled to ask the service provider to change its client classification. Application for such change is to be made in writing. Such reclassification may have an effect on both investor protection and application of this code of conduct.
A client classified as a professional may on application be treated as a non-professional or as an eligible counterparty. Correspondingly, a client classified as a non-professional may on application be treated as a professional client. An eligible counterparty in turn may on application and be treated as a professional or as a non-professional client. The service provider considers the applications individually in order to decide whether to accept of reject the application.
A professional client is obliged to ask for treatment as a non-professional, if the client considers that he or she does not have adequate experience and knowledge to estimate or manage the risks involved in a particular transaction.
3. How classification impacts investor protection
According to Finnish legislation, non-professional clients are covered by the protection provided by the Investors’ Compensation Fund. The Fund compensates non-professional investors for losses incurred in situations where a member of the Fund has failed to settle the investors’ clear and undisputed claims as agreed. The amount of compensation payable to one single investor equals nine-tenths of the amount of the claim that the investor has on one single service provider, yet a maximum of €20,000. The Fund does not compensate for losses arising from declines in equity prices or wrong investment decisions, as the client is responsible for the consequences of his or her own investment decisions. Non-professional clients of foreign service providers’ branches in Finland are principally covered by investor protection provided in the service provider’s home state.
The protection given by the Investors’ Compensation Fund does not cover clients of service providers who provide transmission of orders, investment advisory or arrangement of multilateral trading service but do not have client assets in custody or under management.
4. How classification impacts application of code of conduct
Non-professional clients
Prior to conclusion of any written contract, non-professional clients are to be given the terms and conditions of the contract and adequate information on both the service provider and the service provided.
Any material changes in the information provided must also be reported. The information is to be provided in a durable media to enable the client to print out or record it. The information may also be given on the service provider’s website if the client has agreed to such an arrangement.
Assessment of appropriateness:
When providing the service of transmission of orders to a non-professional client the service provider is required to ask the client for information
on the client’s investment experience and knowledge of the financial instrument concerned or of the investment service concerned in order to be
able to assess whether the financial instrument or service is appropriate for the client. The service provider is entitled to rely on the information
provided by the client.
If the service provider considers that any financial instrument or service is not appropriate for the client, the service provider informs the client accordingly. The service provider is also required to inform the client if it is unable to assess the appropriateness of the financial instrument or service because the client has failed to give the information necessary for making the assessment. No assessment need be made for the purpose of executing or transmitting an order placed by the client for a non-complex instrument of the kind referred to in the law.
Assessment of suitability:
Prior to providing investment service, providers of investment advisory and asset management services are required to obtain adequate information on the client’s financial position, experience and knowledge of the investment service or financial instrument concerned and on the client’s investment objectives in order to be able to recommend financial instruments or services suitable for the client. The service provider is entitled to rely on the information provided by the client.
On the basis of the above information obtained by it, the service provider estimates whether the advice to be given or service to be provided meets the client’s investment objectives, whether the client is financially able to carry the risk and whether the client has the necessary investment experience and knowledge to understand the risks involved in the recommended measures.
If it fails to get adequate information, the service provider may not recommend the investment service or financial instrument to the client. The service provider may then at its discretion estimate the significance of the client’s failure to give the information required for the assessment of suitability.
Professional clients
Professional clients are to be given a general description of the nature of the financial instruments that are the subject of the service and of the risks typically involved in them, if necessary in view of the client’s investment experience.
Assessment of suitability:
Prior to providing investment service, providers of investment advisory and asset management services are required to obtain adequate information on the client’s financial position and investment objectives in order to be able to recommend financial instruments or services suitable for the client. The service provider is entitled to rely on the information provided by the client.
On the basis of the above information obtained by it, the service provider estimates whether the advice to be given or service to be provided meets the client’s investment objectives.
If it fails to get adequate information, the service provider may not recommend the investment service or financial instrument to the client. The service provider may then at its discretion estimate the significance of the client’s failure to give the information required for the assessment of suitability.
Eligible counterparties
An eligible counterparty may request the service provider in writing that this code of conduct designed for the protection of investors be applied to all or individual transactions entered into with the eligible counterparty concerned. The service provider considers case by case whether to agree to the request. In no other cases does either this code of conduct or investor protection apply to eligible counterparties.
Client classification criteria