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Central Bank warns investment firms over failure to carry out proper risk assessments for consumers


The Central Bank of Ireland

The Central Bank of Ireland

The Central Bank of Ireland

THE Central Bank has found shortcomings in how investment firms are screening clients before recommending investments for them.

A probe of the industry shows firms are not taking enough account of the knowledge and experience of consumers before selling them complex products.

Firms selling investments are required to carry out tests to assess a consumer's knowledge and experience and to determine whether a product is appropriate.

But a thematic inspection by regulators found evidence that a number of firms are not paying sufficient attention to the requirements.

The Central Bank accused firms of placing "undue reliance on 'box-ticking' to demonstrate compliance".

Appropriateness requirements are a key protection for consumers when purchasing complex investment products without financial advice or a recommendation, the regulators said.

If the product is not appropriate, firms must issue a clear warning to the consumer.

"In many cases, firms' practical application of the requirements was undermined by weak processes, systems and controls; resulting in errors and assessments proceeding with incomplete information," the Central Bank said.

Many firms are relying on a blanket approach for gathering client information that fails to consider the significant differences in risk and complexity that occurs between investment products.

Firms need to improve the quality of information collected, the regulator said.

It was not clear how firms reached the appropriateness decision in many cases.

Warnings that were issued to clients often used vague and ambiguous language.

The appropriateness warning should not be viewed by firms as a disclaimer which overrides the legal obligations of firms to act in the best interests of the consumer, the Central Bank said.

Director of consumer protection at the Central Bank GrĂ¡inne McEvoy said she and her team are engaging directly with those firms where issues have arisen.

The Central Bank has also sent a letter to all investment firms, detailing the findings of the inspection together with recommendations to enhance their compliance arrangements, where relevant.

Ms McEvoy said that the appropriateness test is a key component of consumer protection for people who are using the services of an investment firm.

Irish Independent