The Dubai Financial Services Authority (DFSA) today published the findings of a thematic review of client classification and suitability practices at regulated firms. The review is part of the DFSA’s risk-based supervisory efforts.
The thematic review started with a comprehensive survey followed by detailed analysis of responses and follow-up visits to selected firms over the course of the year. The review had two primary objectives. First, the DFSA wished to verify that Clients of regulated firms in the DIFC were classified appropriately, according to the rules set out by the DFSA and according to each firm’s authorised activities. Secondly, the DFSA wished to assess how each firm determined the suitability of products and services for each Client, based on that Client’s knowledge, expertise and risk appetite. The review also focused on how firms were documenting the suitability assessments.
The review found that while overall processes for client classification and suitability assessments had improved since the last review in 2012, concerns remained. This included in some cases, insufficient training and guidance provided to staff to perform client classification assessments; inadequate and often unclear documentation to support assessments; and over-reliance on ‘tick-box’ assessment approaches rather than detailed qualitative assessments. The DFSA noted continued concerns around the appropriateness of using “suitability waivers” and other language in Client Agreements to limit liability, duties and obligations in respect of suitability.
In light of the findings of the review, the DFSA offered recommendations to regulated firms to support the enhancement of relevant systems and controls and to ensure Clients’ interests are properly considered and protected. These include:
• Develop appropriate policies and procedures, including operational procedures, to:
o provide sufficient guidance on the steps required to carry out assessments supporting client classification;
o document client assessments in a more robust manner, including the final client classification; and
o ensure all Clients are notified of their right to be classified as a Retail Client.
• Provide training programmes to ensure all client-facing staff are knowledgeable of client classification.
Mr Ian Johnston, Chief Executive of the DFSA, said: “The Dubai International Financial Centre (DIFC) has evolved into a hub for wealth management and advisory services for individuals, families, and other Clients who should be able to rely upon the judgments of our financial professionals. All firms must keep in mind that client classification and suitability assessments, and all forms of investor protections, are and will continue to be very high DFSA priorities and will feature in the DFSA’s future supervisory agenda.
“We expect this report to be instructive to Firms and their staff and to promote certain behaviours conducive to the best interests of Clients in the DIFC.”
Click here to access the Client Classification Report on the DFSA’s website.
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