Table of contents

1. The legal framework as in force
   1. “MiFID II” as the point of reference legislative act
      1. Introductory remarks
      2. In particular: on retail clients
   2. Assessment of suitability and appropriateness of investment services and financial instruments provided to clients: the provisions of Article 25(1)-(4) MiFID II – in brief
   3. Commission delegated acts
      1. Introductory remarks: the two categories of delegated acts
      2. The Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 
2. In particular: relevant ESMA Guidelines
   1. Guidelines adopted by virtue of Article 25 MiFID II
   2. The Guidelines of 3 August 2023 on MiFID II product governance requirements: provisions on the interaction between the target market requirements and the appropriateness assessment
3. The legislative proposal for an “omnibus” Directive as regards EU retail investor protection rules
   1. Introductory remarks
   2. Proposed amendments
      1. Proposed amendments to Article 25(1)
      2. Proposed amendments to Article 25(2)
      3. Proposed amendments to Article 25(3)
      4. Proposed amendments to Article 25(4) and (8)
4. Concluding remarks and a brief assessment
5. Secondary sources

A. The legal framework as in force

I. “MiFID II” as the point of reference legislative act

1. Introductory remarks

(1) Directive 2014/65/EU of the European Parliament and of the Council (hereinafter ‘the co-legislators’) of 15 May 2014 “on markets in financial instruments (…) (recast)”^[1]OJ L 173, 12.6.2014, pp. 349-496. (‘MiFID II’) governs, inter alia, the stricto sensu protection of retail investors,^[2]On this term, see Gortsos (2018). some aspects of which are the key issue discussed in this article. This legislative act, which contains 97 Articles and was published before the “Capital Market Union” (‘CMU’) project was launched,^[3]See however Section C below, under C.I (2). was adopted in accordance with the ordinary legislative procedure laid down in Article 289(1) of the Treaty on the Functioning of the European Union^[4]Consolidated version, OJ C 202, 7.6.2016, pp. 47-200. (‘TFEU’) on the legal basis of Article 53(1) TFEU on the coordination of the provisions laid down by law, regulation or administrative action in Member States concerning the taking-up and pursuit of activities as self-employed persons.^[5]On this TFEU Article see, by mere indication, Schlag (2019). In accordance with the 3-level so-called “Lamfalussy procedure”, this is a “level 1” act.^[6]On the Lamfalussy procedure and its levels, see Gortsos (2023a), pp. 413-423 (and the literature cited therein). It is in force as amended 11 times,^[7]The most recent consolidated text of this legislative act as of 28 March 2024 is available at: … Continue reading which in the author’s view raises per se concerns as to legal certainty.^[8]See further Section D below.

As of 3 January 2018,^[9]MiFID II, Article 94, first sub-paragraph, as amended by Article 1, point (8) of Directive (EU) 2016/1034 of the co-legislators of 23 June 2016, which amended MiFID II (OJ L 175, 30.6.2016, … Continue reading MiFID II repealed Directive 2004/39/EC of the co-legislators of 21 April 2004 on the same aspect (‘MiFID I’),^[10]OJ L 145, 30.4.2004, pp. 1-44. On this legal act, see by mere indication the various contributions in Ferrarini and Wymeersch (2006, editors), Moloney (2008), pp. 337-571 and the various … Continue reading which in turn had repealed Council Directive 93/22/ΕEC “on investment services in the securities field” (‘ISD’),^[11]OJ L 141, 11.6.1993, pp. 27-46. which was the first EU legal act laying down the conditions for the establishment of a single capital market in the European Union (‘EU’).^[12]On the evolution of MiFID II, see Moloney (2023), pp. 354-362. MiFID I was also repealed by Regulation (EU) No 600/2014 of the co-legislators of 15 May 2014 “on markets in financial instruments (…)”^[13]OJ L 173, 12.6.2014, pp. 84-148, as in force. (‘MiFIR’), which contains 55 Articles. MiFID II and MiFIR are referred to as ‘twin legal acts’.^[14]On these twin acts, see by means of mere indication Moloney (2023) in various Chapters (on a thematic basis), Sethe (2014a) (relating to its impact on Swiss capital markets law) and (2014b) (on the … Continue reading

These legislative acts are sources of EU capital markets law, and their provisions mainly apply to investment firms. However, several of the pro­vi­sions of MiFID II and the entire MiFIR also apply (inter alia) to credit institutions if their license covers the provision of investment services and/or the performance of in­vest­ment activities.^[15]MiFID II, Article 1(3), point (b) and MiFIR II, Article 1(2). In terms of definitions: ‘investment firm’ means – in principle – any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis;^[16]MiFID II, Article 4(1), point (1). ‘credit institution’ means^[17]Article 4(1), point (1), (a) and (b), respectively, of Regulation (EU) No 575/2013 (Capital Requirements Regulation, ‘CRR’), OJ L 176, 27/6/2013, pp. 1-337, as in force. The provisions of … Continue reading (a) an undertaking the business of which consists of taking deposits or other repayable funds from the public and granting credits for its own account (according to the traditional definition), and (b) an undertaking the business of which consists of carrying out any of the activities referred to in points (3) and (6) of Section A of Annex I to MiFID II subject to specific conditions (namely, dealing on own account and underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis) subject to specific conditions (inter alia, the total value of its consolidated assets exceeds 30 billion euro, the so-called ‘Class 1 investment firm’).

(2) One of the key features of MiFID II is that the level of protection provided to investors/clients does not have to be equal but may be differentiated de­pend­ing on their sophistication.^[18]The same also applied under MiFID I; see on this Gortsos (2008), pp. 105-112. Recital (86) makes in this respect the following consideration:

“One of the objectives of this Directive is to protect investors. Measures to protect investors should be adapted to the particularities of each category of investors (retail, professional and counterparties). However, in order to enhance the regulatory frame­work applicable to the provision of services irrespective of the categories of clients concerned, it is appropriate to make it clear that [the] principle to act honestly, fairly and professionally and the obligation to be fair, clear and not misleading apply to the relationship with any clients.”^[19]That principle and this obligation are laid down in Articles 24(1) and (3), respectively.

In that respect, MiFID II introduced the following provisions on the cate­gori­sation of clients: on the one hand, with regard to the investment services of receiving, transmitting and executing orders on behalf of clients and dealing on own account,^[20]‘Dealing on own account’ means trading against proprietary capital resulting in the conclusion of transactions in one or more financial instruments (ibid., Article 4(1), point (6)). a “three-tier categorisation” has been introduced: retail clients,^[21]On the specific need to protect retail investors under MiFID I and the limits of that regulatory framework, see Moloney (2006), p. 418-420. professional clients, meaning clients meeting the criteria laid down in Annex II to MiFID II, and eligible counterparties.^[22]Transactions executed with eligible counterparties are governed by Article 30 MiFID II. On the other hand, with regard to the other investment services, a “two-tier categorisation” has been introduced: retail clients and professional clients.^[23]The categorisation of investors into retail and professional clients was, in principle, also provided in Article 11 ISD, but no criteria were laid down in order to determine how this categorisation … Continue reading

The practical implication of these categorisations is the level of protection provided to the client or potential client.

2. In particular: on retail clients

Retail clients deserve the highest level of investor protection according to MiFID II and are defined (in a deductive way and following an “one-size-fits-all approach”^[24]It is interesting to note though that MiFID II does not – and correctly so – refer to the notion of the “average” investor. In contrast, as regards consumers, the Court of Justice of the EU … Continue reading) as clients who are not professional ones.^[25]MiFID II, Article 4(1), point (11); ‘professional client’ means a client meeting the criteria laid down in Annex II (ibid., Article 4(1), point (10)). The term ‘client’ is defined … Continue reading In some cases, reference is also made in this legislative act to ‘consumers’ (see, e.g., recital (77) and Articles 74(2) and 75(1)). Retail investors are also referred to as “consumer” investors. This may be confusing, especially if read as leading to the unjustified conclusion that the policy objectives of investor and consumer protection are identical (although they share in common the rationale for eliminating/mitigating information asymmetries). In this respect, it is beyond any doubt that the investor as a shareholder or a bondholder is not a consumer whatsoever and cannot, by definition, be treated/protected as such. On the other hand, the investor as a counterparty to an institution providing in­vest­ment services is lato sensu indeed a consumer of financial services. However, he/she will be protected as a consumer if he/she fulfils the conditions required by the relevant EU legislation (namely, a natural person who, in contracts covered by the relevant legal act, is acting for purposes which are outside his/her trade, business or profession).^[26]For example, a retail investor is entitled to protection under Council Directive 93/13/EEC of 5 April 1993 “on unfair terms in consumer contracts” (OJ L 95, 21.4.1993, pp. 29-34) if their … Continue reading

Furthermore, the objectives of the legal acts governing investor protection, on the one hand, and consumer protection, on the other, are largely different.^[27]See on this also Thiele (2014), p. 103, arguing that this is a development which is not solely observed after the recent international financial crisis. On the consumer of financial services and the … Continue reading Accordingly, it is this author’s opinion that the use of the term ‘consumer’ in MiFID II is not fully justified, unless it is used for reference to consumer protection legal acts (see, e.g., Articles 24(6) and 25(7)) and the retail investor fulfils the legislative requirements to be regarded as a consumer.^[28]Pursuant to Article 25(7) MiFID II, if a credit agreement relating to residential immovable property has as a prerequisite the provision to a consumer of an investment service in relation to … Continue reading

II. Assessment of suitability and appropriateness of investment services and financial instruments provided to clients: the provisions of Article 25(1)-(4) MiFID II – in brief

(1) Under the current legislative framework and namely, Article 25 MiFID II, investment firms (and credit institutions)^[29]Article 25 belongs to those which apply to credit institutions by virtue of Article 1(3), point (b). With one sole exception (and the conclusions), in the rest of this study reference will only be … Continue reading must ensure and demonstrate to their (national) competent authorities (‘NCAs’) on request that natural persons giving investment advice or information about financial instruments,^[30]‘Financial instrument’ means those instruments specified in Section C of Annex I, including such instruments issued by means of distributed ledger technology (ibid., Article 4(1), point (15)). investment services or ancillary services to clients on behalf of the investment firm possess “the necessary knowledge and competence” to fulfil their obliga­tions under Articles 24-25.^[31]Ibid., Article 25(1), first sentence. This provision, which does not apply to eligible counterparties (ibid., Article 30(1), first sub-paragraph), was based on the considerations set out in … Continue reading This same Article governs the assessment of suitability and appropriateness of clients.

(2) Suitability and appropriateness assessments differ significantly in terms of the information collected from retail clients: on the one hand, the “suitability” test applies in relation to the investment advice and portfolio management investment services (Article 25(2));^[32]‘Investment advice’ means the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions … Continue reading and on the other hand, the “ap­pro­pri­ate­ness” test applies in relation to other investment services (Article 25(3)), except for such services only consisting of execution or reception and transmission of client orders (Article 25(4), hereinafter the ‘execution-only regime’).^[33]‘Execution of orders on behalf of clients’ means acting to conclude agreements to buy or sell one or more financial instruments on behalf of clients, including the conclusion of agreements to … Continue reading In particular:

First, to enable it to recommend to a client or potential client the investment services and financial instruments that are “suitable” for that client and, in particular, are in accordance with its risk tolerance and ability to bear losses, when providing investment advice or portfolio management, the investment firm must obtain the necessary in­for­ma­tion regarding that client’s: (a) knowl­edge and experience in the investment field relevant to the specific type of product or service, including risk awareness; (b) financial situation including that client’s ability to bear losses; and (c) investment objectives including their risk tolerance.^[34]National law must ensure that where investment advice is provided recommending a package of services or products bundled pursuant to Article 24(11), the overall bundled package is suitable (ibid., … Continue reading When the switching of financial instruments is involved in the provision of such investment services, the investment firm must obtain the necessary in­for­ma­tion on the client’s investment and analyse the costs and benefits of switching; in the case – in particular – of investment advice provision, the investment firm must inform the client about this cost-benefit analysis.^[35]Ibid., Article 25(2), third sub-paragraph, inserted by Article 1, point (5) of Directive (EU) 2021/338 of the co-legislators of 16 February 2021, which amended MiFID II (OJ L 68, 26.2.2021, … Continue reading

Second, when providing investment services other than those referred to above, investment firms must ask the client or potential client to provide information regarding (only) that client’s knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded. This should enable the investment firm to assess whether the investment service or product envisaged is “appropriate” for that client.^[36]If a bundle of services or products is envisaged pursuant to Article 24(11), the assessment shall consider the appropriateness of the overall bundled package. If the investment firm considers, on the basis of the information received, that the product or service is not appropriate to that client, it shall warn that client. If the latter does not provide the information referred to above, or the information regarding its knowledge and experience is insufficient, the investment firm shall warn that person that it is not in a position to determine whether the service or product envisaged is appropriate for it.^[37]Both warnings may be provided in a standardised format; ibid., Article 25(3), first – third sub-paragraphs.

Third, by means of exception under the execution-only regime, investment firms are allowed not to obtain the information or make the “appropriateness” de­ter­mi­na­tion when providing to a client investment services only consisting of exe­cu­tion or reception and transmission of client orders with or without an­cil­lary ser­vices, excluding the granting of credits or loans as specified in Section B.1 of Annex I that do not comprise of existing credit limits of loans, current accounts and overdraft facilities of clients, if the conditions set out in Article 25(4) are met.^[38]On this provision, see also recital (80) MiFID II.

(3) Accordingly, during an appropriateness assessment, less information is gathered compared to that of a suitability assessment. This difference is reasonable since the provision of effective advice or portfolio management services requires a thorough understanding of the client’s entire profile (and, thus, a suitable investment strategy should be recommended). In contrast, appropriateness assessment gathers minimal information, focusing on the client’s knowledge and experience (in this case, a warning is sufficient).

III. Commission delegated acts

1. Introductory remarks: the two categories of delegated acts

MIFID II empowers in several Articles the Commission to adopt delegated acts in the meaning of Article 290 TFEU, as follows:

First, several delegated acts have been adopted in accordance with Article 89 MiFID II.^[39]Under this Article, the delegation has been conferred on the Commission for an in­de­ter­mi­nate period of time from 2 July 2014 and may be revoked at any time by the co-legislators. … Continue reading This is the case, inter alia, in Article 25. In particular, by virtue of Article 25(8), the Commission has been empowered to adopt delegated acts in accordance with Article 89 to ensure that investment firms comply with the principles set out in Article 25(2)-(6) when providing investment or ancillary services to their clients. These delegated acts should take into account (inter alia): “(c) the retail or professional nature of the client or potential clients (…)”.^[40]In addition, by virtue of Article 25(4), point (a), the Commission adopted on 13 December 2017 in accordance with the examination procedure referred to in Article 89a(2) its Implementing … Continue reading

Second, on the basis of other MiFID II Articles (but not – yet – of Article 25^[41]See on this, however, also Section C below, under C.II.4 (1).), the Commission has been empowered to adopt delegated and implementing acts in the meaning of Articles 290-291 TFEU, which are based, respectively, on draft regulatory technical standards (‘RTSs’) and draft implementing technical standards (‘ITSs’) of the European Securities and Markets Authority (‘ESMA’), in accordance (respectively) with Articles 10-14 and 15 of its founding Regulation^[42]Regulation (EU) No 1095/2010 of the co-legislators of 24 November 2010, OJ L 331, 15.12.2010, pp. 84-119, as in force. (‘ESMAR’). These delegated and implementing acts constitute the “level 2” of the above-mentioned Lamfalussy procedure.^[43]In the course of adopting draft RTSs and ITSs, the ESMA may request the opinion of the Securities and Markets Stakeholder Group established in accordance with Article 37 ESMAR. On legislative, … Continue reading

2. The Commission Delegated Regulation (EU) 2017/565 of 25 April 2016

In accordance with Article 89 MiFID II, the Commission adopted on 25 April 2016 its Delegated Regulation (EU) 2017/565 supplementing MiFID II “as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive”^[44]OJ L 87, 31.3.2017, pp. 1-83. This is in force as amended 5 times. Under the fourth amendment by Commission Delegated Regulation (EU) 2021/1253 of 21 April 2021 (OJ L 277, 2.8.2021, … Continue reading (hereinafter ‘DR 2017/565’). This is an “omnibus delegated act” based on a total of 19 empowerments by several Articles of MiFID II.^[45]Namely, Articles 4(1)-(2), 16(12), 23(4), 24(13), 25(8), 27(9), 28(3), 30(5), 31(4), 32(4), 33(8), 52(4), 54(4), 58(6), 64(7), 65(7) and 79(8) MiFID II. In relation to Article 25 in general, directly related are Articles 54-63 of the delegated act; as concerns the subject of this study (i.e., suitability and appropriateness assessments), of interest are its Articles 54-57, on which the following is briefly noted:

First, commencing with the recitals, apart from their differences in scope, the two assessments also have different functions and characteristics.^[46] DR 2017/565, recital (84). Furthermore, for the purposes of applying Article 25(2) MiFID II of im­por­tance are the following considerations:^[47]Ibid., recitals (87)-(89).

1. A transaction may be unsuitable for the client or potential client due to the risks of the associated financial instruments, the type of transaction, the characteristics of the order or the frequency of the trading. A series of transactions, each of which are suitable when viewed in isolation may be unsuitable if the recommendation or the decisions to trade are made with a frequency that is not in the best interests of the client. In the case of portfolio management, a transaction might also be unsuitable if it would result in an unsuitable portfolio.
2. Investment firms should undertake a suitability assessment not only in relation to recommendations to buy a financial instrument but for all decisions on whether to trade, including whether or not to buy, hold or sell an investment.
3. A recommendation or request made, or advice given, by a portfolio manager to a client to the effect that the latter should give or alter a mandate to the portfolio manager defining the limits its discretion is covered by Article 25(2).

Second, Article 55 contains specific provisions, which are common to the assessment of suitability or appropriateness (Article 25(2) and (3) MiFID II):

(a) To the extent appropriate to the client’s nature, the nature and extent of the services to be provided to it and the type of product or transaction envisaged, including their complexity and the risks involved, investment firms must ensure that the information regarding a client’s or potential client’s knowledge and experience in the investment field includes the types of service, transaction and financial instrument with which it is familiar, the nature, volume, and frequency of its transactions in financial instruments and the period over which they have been carried out, and the level of its education and profession or relevant former profession.^[48]Ibid., Article 55(1).

(b) In addition, investment firms are not allowed to discourage a client or potential client from providing information required for the purposes of Article 25(2)-(3) MiFID II and are entitled to rely on the information provided by their clients or potential clients, unless they are or ought to be aware that the information is manifestly outdated, inaccurate or incomplete.^[49]Ibid., Article 55(2)-(3).

Third, Article 54 imposes the following (detailed and extensive) requirements with regard to the assessment of suitability on investment firms:^[50]Ibid., Article 54(1)-(2) and (4)-(11), respectively. Article 54(3) refers to the provision of investment services to professional clients. This Article also contains provisions on suitability … Continue reading

(a) They are not allowed to create any ambiguity or confusion about their responsibilities in the process when assessing the suitability of investment services or financial instruments under Article 25(2) MiFID II. When undertaking the suitability assessment, they must inform clients or potential clients, clearly and simply, that the reason for assessing suitability is to enable them to act in the best interest of their clients. In order to take market developments into account and ensure the same level of investor protection, when investment advice or portfolio management services are provided in whole or in part through an automated or semi-automated system, the responsibility to undertake the suitability assessment lies with the institution providing the service and may not be reduced by the use of an electronic system in making the personal recommendation or decision to trade.

(b) They must determine the extent of the information to be collected from their client in light of all the features of the investment advice or portfolio management services to be provided and obtain from the client or potential client all necessary information in order to understand the essential facts about it and have a reasonable basis for determining (on the basis of the nature and extent of the service provided) that the specific transaction to be recommended (or entered into in the course of providing a portfolio management service), satisfies the following criteria: it meets the client’s investment objectives and is such that the client is able financially to bear any related investment risks consistent with his/her investment objectives and has the necessary experience and knowledge in order to understand the risks involved.

(c) The information regarding the client’s financial situation must include, if relevant, information on the source and extent of its regular income, assets (including liquid ones), investments and real property, and regular financial commitments.

(d) The information regarding the client’s investment objectives must include, if relevant, information on the length of time for which it wishes to hold the investment, its preferences regarding risk taking, its risk profile and the purpose of the investment.

(e) If a client is a legal person or a group of two or more natural persons or if one or more natural persons are represented by another natural person, investment firms must establish, implement and record a policy as to the person to be subject to the suitability assessment and how this will be conducted (including from which person will be collected information about knowledge and experience, financial situation and investment objectives).

(f) Investment firms must take reasonable steps to ensure the reliability of the information collected about their clients or potential clients. If they have an on-going relationship with the client, such as by providing an ongoing advice or portfolio management service, they must have in place, and be able to demonstrate, appropriate policies and procedures to maintain adequate and up-to-date information about clients to the extent necessary to fulfil the requirements under Article 54(2).

(g) Investment firms providing investment advice or portfolio management services and not obtaining the information required under Article 25(2) MiFID II are not allowed to recommend investment services or financial instruments to the client or potential client.

(h) Investment firms must have in place and be able to demonstrate adequate policies and procedures in place to ensure that they understand the nature, features, including costs and risks of investment services and financial instruments selected for their clients and that they assess, while taking into account cost and complexity, whether equivalent investment services or financial instruments can meet their clients’ profile.

(i) Investment firms providing investment advice or portfolio management services are not allowed to recommend or decide to trade if no service or instrument is suitable for the client.

(j) In terms of cost-benefit analysis, investment firms providing such services that involve switching investments – either by selling an instrument and buying another or by exercising a right to make a change in regard to an existing instrument – must collect the necessary information on the client’s existing investments and the recommended new investments and undertake an analysis of the costs and benefits of the switch.^[51]Article 54(12)-(13) govern, respectively, investment firms’ obligation to provide a suitability report to retail clients and periodic suitability assessments.

Third, Article 56 (“Assessment of appropriateness and related record-keeping obligations”, Article 25(3) and (5) MiFID II) reinforces the rule laid down in Article 25(3) MiFID II.^[52]It also provides that investment firms are entitled to assume that a professional client has the necessary experience and knowledge to understand the risks involved in relation to the particular … Continue reading

Finally, Article 57 (“Provision of services in non-complex instruments”, Article 25(4)) specifies that any financial instrument not explicitly specified in Article 25(4), point (a) MiFID II must be considered as ‘non-complex’ for the purposes of point (a)(vi) if 6 criteria are cumulatively satisfied.

B. In particular: relevant ESMA Guidelines

I. Guidelines adopted by virtue of Article 25 MiFID II

(1) At “level 3” of the Lamfalussy procedure, the (“level 1”) legislative acts may impose on the ESMA or confer upon it the power to issue “soft law” in­stru­ments, namely, Guidelines and Recommendations (adopted in ac­cor­dance with Article 16 ESMAR), which specify the rules adopted at levels 1 and 2.^[53]It may also issue Opinions, in accordance with Article 16a ESMAR. Delegated and implementing acts, as well as ESMA Guidelines, include quite detailed provisions in relation to the implementation of … Continue reading In accordance with Article 25(9)-(10) MiFID II, the ESMA should adopt by 3 January 2016 Guidelines specifying criteria for the assessment of knowledge and competence required under Article 25(1) and by 3 January 2016, and periodically update, Guidelines for the assessment of financial instruments incorporating a structure which makes it difficult for the client to understand the risk involved in accordance with Article 25(4), points (a)(ii)-(iii), as well as structured deposits^[54]‘Structured deposit’ means a deposit as defined in Article 2(1), point (3) of Directive 2014/49/EU of the co-legislators of 16 April 2014 “on deposit guarantee schemes (recast)” (OJ L 173, … Continue reading incorporating a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term, in accordance with Article 25(4), point (a)(v).

Furthermore, pursuant to Article 25(11), the ESMA was empowered to develop and periodically update Guidelines for the assessment of financial instruments being classified as non-complex for the purpose of Article 25(4), point (a)(vi) taking into account the Commission’s delegated acts adopted under Article 25(8).^[55]See Section A above, under A.III.1.

(2) The ESMA Guidelines “on complex debt instruments and structured deposits” (ESMA/2015/1787) were adopted on 4 February 2016 on the basis of Article 25(4), points (a)(ii)-(iii) and (a)(v) MiFID II.^[56]At: <https://www.esma.europa.eu/sites/default/files/library/2015-1787_-_guide​lines_​on_​complex_​debt_instruments_and_structured_deposits.pdf>. Their purpose is to specify the criteria for the assessment of debt instruments incorporating a structure which makes it difficult for the client to understand the risk involved, and structured deposits incorporating a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term, and clarify the concept of ‘embedded derivatives’ in order to provide an overall framework for the application of Article 25(4), point (a) MiFID II in relation to debt instruments. The ESMA expects that these Guidelines will strengthen investor protection and promote greater convergence in the classification of ‘complex’ or ‘non-complex’ financial in­stru­ments or structured deposits for the purposes of the appropriateness test for execution-only investment services in accordance with Article 25(3)-(4).^[57]ESMA Guidelines (2016), Section III, paras. 5-7. As to the structure, the Guidelines themselves are laid down in Section V as follows: (i) For the purpose of Article 25(4), points (a)(ii)-(iii) … Continue reading

(3) The recently issued ESMA Guidelines on suitability and appropriateness assessments (Guidelines of 3 January 2022 “on certain aspects of the MiFID II appropriateness and execution-only requirements” (ESMA35-43-2938), and of 3 April 2023 “on certain aspects of the MiFID II suitability requirements” (ESMA35-43-3172)), contain highly detailed implementation (level 1 and level 2) provisions. Having gained substantial experience during the initial adoption of MiFID II, the ESMA provides now more targeted guidance to investment firms on how to comply with the regulatory framework by pursuing the objective of ensuring a consistent and harmonised application of the relevant re­quire­ments. Notably, the Guidelines emphasise the importance of how questions are framed, as the way a question is asked can significantly influence the response.

For instance, regarding client self-assessments, the ESMA highlights the following:^[58]See ESMA35-43-3172, para. 46. See also ESMA35-43-2938, para. 25.

“Self-assessment should be counterbalanced by objective criteria. For example:

– instead of asking whether a client understands the notions of risk-return trade off and risk diversification, the firm should present some practical examples of situations that may occur in practice, for example by means of graphs or through positive and negative scenarios which are based on reasonable assumptions;

– instead of asking whether a client has sufficient knowledge about the main characteristics and risks of specific types of investment products, the firm should for instance ask questions aimed at assessing the client’s real knowledge about the specific types of investment products, for example by asking the client multiple choice questions to which the client should provide the right answer.”

(3) Of relevance are also the ESMA Guidelines of 3 January 2017 “for the assessment of knowledge and competence” (ESMA71-1154262120-153 EN (rev)) adopted on the basis of Article 25(9) MiFID II.^[59]At: <https://www.esma.europa.eu/sites/default/files/library/esma71-1154262120-​153_​guide​lines_for_the_assessment_of_knowledge_and_competence_​corrigendum.pdf>. For … Continue reading These Guidelines set standards for the assessment of knowledge and competence for staff providing relevant services in order to assist with institutions and other firms in meeting their obligations to act in the best interest of their clients and to assist with NCAs to adequately assess how they meet these obligations, is to specify the criteria for the assessment of knowledge and competence required under Article 25(1).

II. The Guidelines of 3 August 2023 on MiFID II product governance requirements on the interaction between the target market requirements and the appropriateness assessment

(1) In accordance with Articles 16(3) and 24(2) MiFID II, firms manufacturing financial instruments and structured deposits (hereinafter ‘products’) for sale to clients or distributing products to clients must maintain, operate and review adequate product governance arrangements. As part of these arrange­ments, a target market of end clients must be identified and pe­ri­odi­cally reviewed for each product, and a distribution strategy must also be consistent with the identified target market.^[60]In particular, Article 16(3) refers to “organisational requirements”. Article 24(2) imposes on investment firms specific obligations regarding the distribution of financial instruments: ensure … Continue reading By virtue of Articles 16(12) and 24(13) MiFID II, the Commission adopted on 7 April 2016 Commission Delegated Directive (EU) 2017/593 of supplementing MiFID II “with regard to safe­guard­ing of financial instruments and funds belonging to clients, product gov­er­nance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits”.^[61]OJ L 87, 31.3.2017, pp. 500-517. Of relevance in this context are Articles 9-10 whose aim is to ensure that firms manufacturing and distributing financial instruments should avoid and reduce, from an early stage, potential risks of failure to comply with investor protection rules.^[62] Commission Delegated Directive (EU) 2017/593, recital (15), first sentence.

(2) On 3 August 2023, the ESMA issued its Guidelines “on MiFID II product governance requirements” (ESMA35-43-3448),^[63]At: <https://www.esma.europa.eu/sites/default/files/2023-08/ESMA35-​43-​3448_​Guide​lines_on_product_governance.pdf>. which are applicable from 3 October of that year and repealed its Guidelines of 2 June 2017 on the same issue (ESMA35-43-620),^[64]At: <https://www.esma.europa.eu/sites/default/files/library/esma35-​43-​620_​report_​on_guidelines_on_product_governance.pdf>. These guidelines apply in relation to the manu­fac­tur­ing or distribution of financial instruments and structured de­posits and in particular, in relation to the requirements set out in Articles 9(3), 16(3) and (6) and 24(1)-(2) MiFID II and (the just above-mentioned) Articles 9-10 of Commission Delegated Directive (EU) 2017/593. In recognising the prob­lem­atic interaction between the target market requirements and the ap­pro­pri­ate­ness assessment, making it difficult to effectively match the information, these Guidelines offer investment firms two options to address the issue:

on the one hand, the ex-ante assessment of the actual target market is influenced by the services provided, since it can be conducted more or less thoroughly depending on the level of client information available, which in turn depends on the type of services provided and the conduct of rules attached to their provision (in particular, investment advice and portfolio management allow for the acquisition of a wider set of information on clients compared to the other services);

on the other hand, the target market assessment influences the decision on the type of services that are going to be provided in relation to the nature of the product and the circumstances and needs of the identified target clients, considering that the level of investor protection varies for different investment services, depending on the rules that apply at the point of sale; in particular, investment advice and portfolio management services allow for a higher degree of investor protection, compared to other services provided under the appropriateness regime or under execution-only.^[65] ESMA Guidelines (2023), para. 53.

Furthermore, the ESMA Guidelines provide the following in respect to this issue:

First, when defining their product assortment, distributors should pay particular attention to situations where they might not be able to conduct a thorough target market assessment by virtue of the type of services they provide. In particular, where they only carry out execution services with the assessment of appropriateness (e.g., through a brokerage platform), they should consider that they will usually be able to conduct an assessment of the actual target market which is limited to the sole categories of clients’ knowledge and experience; where they only conduct execution services under the execution-only regime, not even the assessment of clients’ knowledge and experience will usually be possible.

In this respect, firms should pay particular attention to the distribution strategy suggested by the manufacturer.^[66]Ibid., para. 54 with reference to paras. 19, point (b), 33 and 59-61. This is especially relevant for products characterised by complexity/risk features, as well as for situations where there might be significant conflicts of interest (such as in relation to products issued by entities within the firm’s group or when distributors receive inducements from third parties), being also mindful of the limited level of protection afforded to clients at the point of sale by the appropriateness test, or no protection at all, in the case of execution-only. In such cir­cum­stances, distributors should duly consider all relevant information provided by the product manufacturer, both in terms of potential target market and distribution strategy.^[67]Ibid., para. 55.

Second, since the client’s protection decreases when information available is not sufficient to ensure a full target market assessment, distributors may also decide to let clients operate on a non-advised basis after warning them that the firm is not in the position to assess their full compatibility with such products. In any case, this decision should always be based on the consideration of the product’s features (e.g., in terms of costs/complexity), as well as on other relevant situations (e.g., conflicts of interest in case of self-placement or inducements). Therefore, products should not be distributed under non-advised sales if the distributor cannot reasonably expect (i.e., ex-ante) that the distribution strategy for the product (including its marketing and information strategy) will generally enable the product to reach the identified target market. Likewise, providing a warning that the firm is not in the position to assess a client’s full compatibility with a product does not exempt the firm from the obligation to review products, also taking into consideration any sales outside of the target market.^[68]Ibid., para. 56 with reference to paras. 60 and 72.

A point of concern is whether these two options ensure the same level of investor protection. Although the investment firm bears responsibility for its actions, the ESMA highlights the importance of ensuring that, in cases of non-advised sales, the distributor can reasonably expect the product distribution strategy to effectively reach the identified target market. On the contrary, if distributors intend to approach clients or prospective clients to recommend or actively market or consider a product for the provision of portfolio management, a thorough assessment of the target market should always be conducted. However, the issue remains problematic if the investment firm decides to warn the client, especially considering the firm’s potential lack of authorisation to provide investment advice or the client’s refusal to accept the advice.^[69]Ibid., para. 57.

C. The legislative proposal for an “omnibus” Directive as regards EU retail investor protection rules

I. Introductory remarks

(1) As noted,^[70]See Section A above, under A.II. under the current legislative framework, suitability and appropriateness assessments differ significantly in terms of the information collected from clients. Specifically, less information is gathered during an appropriateness assessment compared to that of suitability. This difference is logical, as providing effective advice or portfolio management requires a thorough understanding of the client’s profile. In contrast, the ap­pro­pri­ate­ness assessment gathers minimal information, focusing mainly on the client’s knowledge and experience. The differing approach can be attributed to the nature of the investor’s involvement in each scenario. In the case of order reception, transmission and execution, the investor independently takes the initiative to make a specific investment. Conversely, in investment advice, the investor seeks expert guidance to inform their decisions, and in portfolio management, the investor entrusts an expert with the management of their portfolio. Consequently, in the latter two cases, the investment firm must gather detailed information to ensure that the service aligns with the investor’s needs and profile.

However, a critical issue in the current regulatory framework is that, during an appropriateness assessment, aligning the investor’s order with the target market is not feasible unless the investment firm possesses information on criteria beyond the investor’s knowledge and experience, which are also used to define the target market.

(2) On 24 May 2023, the Commission submitted a proposal for a Directive of the co-legislators “amending Directives (…), 2014/65/EU and (EU) 2016/97 as regards the Union retail investor protection rules”^[71]COM/2023/279 final. (hereinafter the ‘legislative proposal’). This is a key element of its “retail investment strategy”, launched on that same day, which aims to empower retail investors to make investment decisions that are aligned with their needs and preferences, ensuring that they are treated fairly and duly protected and is linked to its objectives under the 2020 CMU Action Plan: “A capital markets union for people and businesses”.^[72]COM/2020/590 final. See on this (by means of indication) Gortsos (2022), pp. 14-18.

Once this legislative proposal, which (inter alia) will also amend Article 30 of the Insurance Distribution Directive^[73]Directive (EU) 2016/97 of 20 January 2016 “on insurance distribution (recast)”, OJ L 26, 2.2.2016, pp. 19-59, as in force. (‘IDD’),^[74]Legislative proposal, Article 2, point (22). is finalised,^[75]The European Parliament agreed on its negotiating mandate on the legislative proposal on 23 April 2024. This followed, on 12 June 2024, by the agreement reached by the Council on strengthening the … Continue reading significant changes are anticipated in Article 25 MiFID II,^[76]Legislative proposal, Article 1, point (14). particularly in enhancing the information collected from retail clients. A key objective (as far as MiFID II is concerned) is ensuring that suitability and appropriateness tests are better adapted to retail investors’ needs, as well as to clarify and strengthen the requirements that distributors need to comply with when assessing the suitability of a recommendation or the appropriateness of a financial product for the retail investor.^[77]Ibid., Explanatory memorandum, p. 19. In meeting this objective, Article 25(1)-(3), as well as 25(4) and (8) would be amended as discussed just below.

II. Proposed amendments

1. Proposed amendments to Article 25(1)

Suitability and appropriateness assessments need to be conducted by in­vest­ment firms in good time before the provision of investment advice or portfolio management or the execution or reception and transmission of an order and be determined on the basis of information about the client or potential client as obtained by the investment firm. Furthermore, investment firms shall:

first, ensure that the purpose of the assessment is explained (in a standardised format) to the client or potential client before any information is requested from them;

second, inform retail investors, through standardised (as well) warnings, about the negative consequences on the quality of the assessment if they do not provide accurate and complete information, as well of the fact that the absence of information shall prevent the financial firm to determine whether the service or financial instrument envisaged is suitable or appropriate for them and to proceed with the recommendation or the execution of an order; and

third, upon request of the retail client, provide them with a report on the information collected for the purpose of the suitability or appropriateness assessment (also in a standardised format).^[78]The ESMA is required to develop draft RTS to determine the above explanation and warning, as well as the format and content of the above report (and submit them to the Commission 18 months after the … Continue reading

2. Proposed amendments to Article 25(2)

In respect of this Article, the following amendments are proposed:

first, portfolio diversification will be also added to the elements that distributors need to assess when considering the suitability of a specific product or service on the basis of information obtained from the client or customer, including information on any existing portfolios.

second, in order to encourage the provision of independent advice, the proposal introduces the possibility for independent advisors to provide advice limited to a range of diversified, non-complex and cost-efficient financial instruments; for these products, distributors will be able to perform a suitability assessment on the basis of more limited information about the client; and

third, given that investment advice is limited to well-diversified and non-complex products, an assessment of the knowledge and experience of clients, together with their portfolio diversification, will not be required.

3. Proposed amendments to Article 25(3)

To increase the relevance of the appropriateness assessment and strengthen the safeguards protecting retail investors from inappropriate investments, the scope of client’ information that financial firms need to obtain and assess is expanded to also encompass the capacity to bear full or partial losses and risk tolerance. This amendment would significantly improve the alignment between appropriateness assessments and the target market. In case of a negative appropriateness assessment on the basis of the information received, the investment firm shall warn the client or potential client; that warning shall be provided in a standardised format and shall be recorded. In this case, it shall only proceed with a transaction subject to a warning indicating that the product of service is not appropriate at the client’s explicit request. Both demand of the client and acceptance of the firm shall be recorded.^[79]The ESMA is required in this case as well to develop draft RTS to determine the format and content of the above warning (and submit them to the Commission within the same above-mentioned 18-months … Continue reading

4. Proposed amendments to Article 25(4) and (8)

(1) It is proposed to add in Article 25(4) a requirement on the ESMA to develop draft RTSs (and submit them to the Commission with the same above-mentioned 18-months period) to determine the format and content of warning referred to in the first sub-paragraph, point (c).^[80]This is the third condition under the execution-only regime, in accordance to which investment firms may not need to obtain the information or make the appropriateness determination when “the … Continue reading The Commission is empowered to adopt them in accordance with Articles 10-14 ESMAR.

(2) It is also proposed to further enhance Article 25(8)^[81]See Section A above, under A.III.1. to the effect that power should be conferred upon the Commission to supplement MiFID II by adopting delegated acts in accordance with Article 89 to ensure that investment firms comply with the principles set out Article 25(1)-(6) when providing investment or ancillary services to their clients, including information to obtain when assessing the suitability or appropriateness of the services and financial instruments for their clients, criteria to assess non-complex financial instruments for the purposes of Article 25(4), point (a)(vi), the content and the format of records and agreements for the provision of services to clients and of periodic reports to clients on the services provided.^[82]The delegated acts will have to take into account: (a) the nature of the services offered or provided to the client or potential client, having regard to the type, object, size, costs, risks, … Continue reading

D. Concluding remarks and a brief assessment

(1) The legislative proposal on amending MiFID II further enhances investor protection in relation to the suitability and appropriateness assessments. As noted,^[83]See Section C above, under C.I (2). the key objective is to ensure that suitability and appropriateness tests are better adapted to retail investors’ needs, and to clarify and strengthen the requirements that distributors need to comply with when assessing the suitability of a recommendation or the appropriateness of a financial product for the retail investor. This is mainly pursued by enhancing the information collected from retail clients. In that respect, the legislative proposal addresses (to a certain extent at least) the inherent issue of in­for­ma­tion asymmetry in capital markets by highlighting the significance of accurate and appropriate information.

(2) Notwithstanding the above, the question remains open whether there is a need to further review the existing classification of investors in EU law (in terms of their protection) taking into consideration that all retail investors may not merit the same of level of protection. In addition, a point of concern is whether the objective of preventing mis-selling is effectively achieved through the regulatory framework governing suitability and appropriateness as­sess­ments. Other related aspects are also of primary importance: the aging population issue; financial literacy/education and inclusion; the role of social media in the dissemination of (accurate) information and the resulting problem of “mis-information”; language barriers for (some segments of) retail investors; as well as digital innovation.^[84]On sustainability, financial technology (FinTech) and financial inclusion, see Zetzsche et al. (2021). In an effort to address the rise in retail investor fraud and manage the risks posed by … Continue reading

(3) The following should also be noted with a view to the broader picture:

First, based on recent memory from the immense losses in investments in capital markets due the (2007-2009) Global Financial Crisis (‘GFC’) and the subsequent euro area fiscal crisis, investors’ risk profile has on average been altered by to risk aversion considerations (lower “risk appetite”). This is a negative sign in view of the role of the EU financial system in filling in investment gaps in the EU economy as recently discussed in the “Draghi Report” of September 2024 on “The future of European competitiveness”,^[85]At: <https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en>. which also advocates for the further Europeanisation of capital markets supervision by enhancing the related powers of the ESMA and introducing a European Security Exchange Commission as a key pillar of the CMU.^[86]Draghi Report, Part B: In-depth analysis and recommendations, pp. 292-293.

Second, the legislative proposal (and the Commission’s “retail investment strat­egy” overall) fall short in addressing some significant obstacles to furthering capital markets integration in the EU. It is true that some obstacles are due to structural features of the EU financial system (that remains predominantly bank-based) and cannot be addressed by legislative action.^[87]See on this by means of indication Valiante (2018). On the other hand, the degree of market fragmentation within the EU (albeit higher in the banking system than in – some segments – of capital markets) is also high taking into account the (still) existing differences among Member States.^[88]See Commission Staff Working Document “Monitoring progress towards a Capital Markets Union: a toolkit of indicators”, SWD(2021) 544, Overview of CMU Indicators – Update 16 August 2023 (at: … Continue reading According to the third edition of the ECB biennial Report “Financial Integration and Structure in the Euro Area” (FISEA Report) of 18 June 2024^[89]At: <https://www.ecb.europa.eu/press/fie/html/ecb.fie202406~c4ca413e65.en.html>. based on a review of the standard set of ECB indicators of financial integration and structure: despite the resilience demonstrated during crises, progress on financial integration in the euro area has been disappointing overall; price- and quantity-based financial integration indicators have substantially declined over the past two years, with no sizeable increase since the inception of the EMU; and despite significant legislative efforts over the last decade, cross-border financial market activities and risk sharing have not grown; a “piecemeal approach” seems to have been taken towards many of the reform efforts. In this respect, the FISEA Report proposes three lines of (potentially) mutually reinforcing action for making additional funding capacities available: “unfreezing” a share of the unproductive deposits held by euro area house­holds; developing bond and equity markets to make them more attractive for issuers and investors; and enhancing the attractiveness of euro area financial markets for foreign investors.^[90]It also advocates for progress in specific policy domains for bolstering financial integration – inter alia: harmonising the definition of key concepts in the EU regulatory frameworks; integrating … Continue reading

Third, and equally important, there is an urgent need – by returning to the “origin” – to overcome national restrictions on capital movements,^[91]These are set out on Article 65(1), points (a) (tax differentiation) and point (b) TFEU (financial prudential supervision measures; administrative and statistical information; and public policy … Continue reading since the free movement of capital can help gear up financial integration and the CMU.^[92]On the barriers to cross-border funding within the EU by country-specific legislation, action is required including, inter alia, a “targeted” update of the Commission’s 2017 Report … Continue reading

(4) As John Berrigan correctly noted in a speech on 10 April 2024, the CMU is more than ever a “need to have” and not just a “nice to have”. However, taming (very high) expectations on the role of the CMU until the above problems and the “cultural” and informational/educational gaps have been adequately addressed is equally important. Thus, the trade-off is delicate: enhancing the (still) uncompleted and fragmented (“silos”) EU regulatory framework, as partially proposed in the Commission’s “retail investment strategy”, versus overcoming inherent problems, the risk of “regulatory overshooting”,^[93]In this respect, the Draghi Report notes (Part B: In-depth analysis and recommendations, p. 310):“The Commission’s legislative activity has been excessively growing, also due to passive scrutiny … Continue reading avoid­ing “gold-plating”, ensuring “legal certainty” (which is negatively affected by the frequent amendments of EU capital markets law) and the thorny issue – due to diverging priorities of Member States – of (still existing) national barriers in capital movements.

(5) It is reasonably expected that some of the above concerns will be effectively addressed in and tackled by the Savings and Investments Union (‘SIU’) strategy unveiled by the Commission, on 19 March 2025, with the aim to boost the EU economy’s competitiveness, by improving the way the EU financial system mobilises savings towards productive investments and enhancing financial opportunities for EU citizens and businesses. This is contained in the Com­mis­sion’s Communication titled: “Savings and Investments Union: A Strat­egy to Foster Citizens’ Wealth and Economic Competitiveness in the EU.”^[94]COM/2025/124 final, at: <https://ec.europa.eu/commission/presscorner/detail/en/ip_25_802>. The related Commission’s Q&As on that Communication of 19 March as well are available at: … Continue reading Inter alia, this strategy should also be viewed as a follow up to the initiatives discussed above on enhancing retail investor protection (albeit with a broader focus). As noted in the preamble:

“The [SIU] should encompass all of the EU financial system and be developed at both EU and national levels. The [SIU] should draw on progress already made under the two Capital Markets Union Action Plans and the parallel efforts to develop the Banking Union.

It should be developed further using the most effective measures, both legislative and non-legislative, factoring in the dual objectives of financial stability and sustainable competitiveness in the EU, while taking into account the EU’s strategic goals.”^[95]SIU Communication, p. 4. Thus, the SIU takes a holistic approach, encompassing both the Banking Union and the CMU.