UK banks must check suitability of customers to products

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By Huw Jones

LONDON (Reuters) - Financial firms unable to demonstrate that their stocks and bonds products are being sold to the right customers from January could fall foul of regulators, Britain's banking trade body said on Wednesday.

UK Finance published guidance on Wednesday to ensure banks are consistent in how they check if end customers are suited to their products.

Third parties such as wealth managers who sell products on behalf of banks must also show they understand what sort of customers fall within clearly defined "target markets".

"UK Finance has developed guidelines on this target market criteria so firms can share data in the knowledge their activity will be broadly in line with a common industry approach," it said.

The requirements are being introduced on Jan. 3 under a European Union law known as MiFID II, and the guidance seeks to help financial firms in Britain comply with it.

Bankers are rushing to meet the January deadline as regulators put last minute finishing touches to the rules.

The EU approved a decision on Wednesday to allow European investors to continue trading shares listed on U.S. and other exchanges, removing major uncertainty for banks.

MiFID marks a step change in how products are designed and sold to ensure that pressure to chalk up sales does not translate into products being sold to customers who do not understand or are unable to manage the risks they pose.

The guidance focuses on the information that must be exchanged between the banks who design products and third parties who sell them, said Rob Driver, a policy lead at UK Finance.

"Firms will need to develop and apply an appropriate target market criteria to help demonstrate the right products are being offered to the right end-clients," he said.

Although Britain is due to leave the EU in March 2019, UK Finance expects that UK financial firms will have to continue applying the rules after Brexit day.

The guidance has been drawn up after discussions with Britain's Financial Conduct Authority, which will enforce MiFID II in the UK, and lawyers.

There is already market speculation the FCA might go further and launch a root-and-branch review of product governance.

One of the aims of MiFID II is to toughen up investor protection and make it easier for regulators to crack down on mis-selling of financial products that contain shares, bonds, derivatives or commodities.

EU regulators are also being given powers to ban products that harm consumers, but UK Finance hopes the guidance will help to avert such action in the first place.

(Reporting by Huw Jones, editing by David Evans)

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