Suitability of Investment Advice in Luxembourg Private Banking: Information to Collect Before Advising a Client
Investment advice is legally conditioned on sufficient client information.
Article 37-3(4) of the Luxembourg law of 5 April 1993 on the financial sector, as amended (the “LFS“) sets the first rule. Before investment advice or portfolio management, the firm must obtain necessary client information. If it does not obtain the information required for the suitability assessment, Article 54(8) of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 (the “Delegated Regulation“) prevents it from recommending investment services or financial instruments. This text is not administrative guidance. As an EU regulation, it is binding in its entirety and directly applicable in Member States under Article 288 of the Treaty on the Functioning of the European Union.
Although this article uses a private-banking lens, Article 37-3(4) of the LFS applies more broadly to credit institutions and investment firms when they provide investment advice or portfolio management; investment funds may be the instruments recommended, but they are not targeted as such by this rule. The suitability report described below is specifically framed for retail clients.
Three Conditions to Demonstrate Suitability
For an investment recommendation to be justified under the regulatory framework, the file must show that (i) the required information was collected, (ii) that information was analysed, and (iii) the results of that analysis were actually taken into account in the advice given.
First, collect the information required under Article 37-3(4) of the LFS. It covers five information points: knowledge and experience, financial situation, capacity to bear losses, investment objectives, and risk tolerance. Article 54(2)(a) of the Delegated Regulation also requires sustainability preferences to be considered where relevant.
Second, connect the information to the recommendation. The advice must correspond to the documented client profile, the product features, its costs, and its risks. This requirement is reflected in Article 54(2) of the Delegated Regulation, which requires firms to assess whether a recommended transaction is suitable in light of the information collected during the suitability assessment.
Third, maintain a disciplined record of the suitability assessment and the reasons supporting the recommendation. Article 54(12) of the Delegated Regulation requires, for retail clients, a suitability report. That report must outline the advice and explain why the recommendation is suitable for that client.
The must-know rule is unambiguous. Article 37-3(4) of the LFS, read with Article 54(8) of the Delegated Regulation, makes suitability information a legal requirement before advice can be provided.
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References:
- Article 37-3(4) of the Luxembourg law of 5 April 1993 on the financial sector, as amended (consolidated working version, Commission de surveillance du secteur financier) (https://www.cssf.lu/wp-content/uploads/L_050493_lfs.pdf)
- Articles 54(2)(a), 54(2), 54(8) and 54(12) of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016, consolidated version (https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX%3A02017R0565-20220802)
- Article 288 of the Treaty on the Functioning of the European Union (https://eur-lex.europa.eu/eli/treaty/tfeu_2012/art_288/oj/eng)
