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					         Consumer Market Study on Advice within
         the Area of Retail Investment Services –
         Final Report

         Prepared for: European Commission,
                       Directorate-General Heath and
                       Consumer Protection




Copyright:

© 2011. Synovate Ltd. All rights reserved.
The concepts and ideas submitted to you herein are the intellectual property of
Synovate Ltd. They are strictly of confidential nature and are submitted to you under
the understanding that they are to be considered by you in the strictest confidence
and that no use shall be made of the said concepts and ideas, including
communication to any third party without Synovate Ltd's express prior consent
Table of Contents

Section 1. Executive summary........................................................................................................... 5
1.1 Study objectives and scope ............................................................................................................ 5
1.2 Study methodology.......................................................................................................................... 5
1.3 Key study findings on the advisory process (EU-level) ................................................................... 6
1.4 Key study findings on product suitability (EU-level) ...................................................................... 11
1.5 Assessing the underlying causes of poor product suitability (EU-level) ....................................... 13


Section 2. Introduction ..................................................................................................................... 14
2.1 Study context ................................................................................................................................. 14
2.2 Study objectives ............................................................................................................................ 15
2.3 Specific tasks and deliverables ..................................................................................................... 16
       2.3.1 Main Task 1 (MT1): Study on the quality and reliability of investment advice ................... 16
       2.3.2 Main Task 4 (MT4): Mystery shopping study ..................................................................... 16
2.4 Information sources ....................................................................................................................... 16
       2.4.1 Secondary research ........................................................................................................... 17
       2.4.2 Interviews with experts or other relevant stakeholders ...................................................... 17
       2.4.3 Mystery shopping ............................................................................................................... 18


Section 3. Frameworks for assessing the quality and reliability of investment advice ............ 21
3.1 Overview of analysis frameworks .................................................................................................. 21
3.2 Analysis framework for examining the advisory process ............................................................. 22
3.3 Analysis framework of product suitability ..................................................................................... 35
3.4 Analysis of issues underlying unsuitable investment advice ........................................................ 49


Section 4. Mystery shopping methodology ................................................................................... 51
4.1 Considerations in the design of the mystery shopping process ................................................... 51
4.2 Design of mystery shopping scenarios and shopper profiles ....................................................... 54
4.3 Methodology for identifying target financial players ..................................................................... 53
4.4 Methodology for allocating mystery shopping locations ............................................................... 55
4.5 Quality control in mystery shopping fieldwork execution and data analysis ................................. 56
4.6 Limitations in the application of mystery shopping results ............................................................ 57




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Section 5. Results of mystery shopping exercise ......................................................................... 59
5.1 Assessment of findings relating to the advisory process (EU level) ............................................. 59
       5.1.1 Due diligence...................................................................................................................... 60
           a) Client‟s investment objectives ............................................................................................ 60
           b) Client‟s level of financial knowledge and investment experience ..................................... 62
           c) Client‟s financial situation ................................................................................................... 63
       5.1.2 Transparency - comprehensiveness of financial advice ................................................... 64
           a) Overall assessment............................................................................................................ 64
           b) Information format .............................................................................................................. 64
           c) Information about firm ........................................................................................................ 64
           d) Information about firm‟s financial instruments ................................................................... 65
           e) Information about costs and associated charges .............................................................. 67
           f) Information about inducements ........................................................................................... 68
           g) Other observations ............................................................................................................. 69
       5.1.3 Transparency - clarity of financial advice .......................................................................... 70
           a) Overall assessment of information transparency ............................................................... 70
           b) General information provision ............................................................................................ 70
           c) Information about the past performance of the financial product ....................................... 70
           d) Information about the future performance of the financial product .................................... 71
5.2 Overview of investment recommendations ................................................................................... 72
       5.2.1 Distribution of recommended investments ......................................................................... 72
       5.2.2 Characteristics of recommended investments .................................................................. 73
           a) Recommendations on investment funds ............................................................................ 74
           b) Recommendations on bonds ............................................................................................. 75
           c) Recommendations on structured products ........................................................................ 77
           d) Recommendations on stocks and alternative investments ................................................ 78
       5.2.3 Characteristics of recommended investments – by countries ........................................... 79
           a) Assessment of product investment risk ............................................................................. 79
           b) Assessment of product investment liquidity ....................................................................... 82
5.3 Assessment of suitability ............................................................................................................... 85
       5.3.1 Overview of investment suitability ...................................................................................... 85
       5.3.2 Assessment of investment suitability by countries ............................................................. 86
           a) Types of investment recommendations ............................................................................. 86
           b) Drivers of investment unsuitability ..................................................................................... 87




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       5.3.3 Assessment of investment suitability by scenarios ............................................................ 88
           a) Types of investment recommendations ............................................................................. 88
           b) Drivers of investment unsuitability ..................................................................................... 88
       5.3.4 Assessment of investment suitability by financial players ................................................. 89
           a) Types of investment recommendations ............................................................................. 89
           b) Drivers of investment unsuitability ..................................................................................... 89
           c) Source of products ............................................................................................................. 90
5.4 Assessment of advisory process for suitable and unsuitable products ........................................ 92
       5.4.1 Due diligence...................................................................................................................... 92
       5.4.2 Transparency - comprehensiveness of financial advice .................................................... 95
       5.4.3 Transparency - clarity of financial advice ........................................................................... 98


Section 6. Summary of results ....................................................................................................... 100


Section 7. Appendix ........................................................................................................................ 101
7.1 List of cities targeted for mystery shopping ................................................................................ 101
7.2 List of financial players targeted for mystery shopping .............................................................. 103
7.3 List of cities targeted for mystery shopping ................................................................................ 110
7.4 Mystery shopping scenarios and briefing notes ......................................................................... 113
7.5 Mystery shopping evaluation form .............................................................................................. 124




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1. Executive summary

  1.1 Study objectives and scope
     In view of growing concerns within the EU regarding the quality and reliability of financial
      advice in the field of retail investment, this study was commissioned to examine the current
      state of retail investment advice across EU Member States, and to evaluate whether
      advisers provide suitable investment advice to retail clients. Where there is evidence of
      unsuitable investment advice, the study should, in so far as this is possible, seek to identify
      and explain possible reasons behind recommendations of unsuitable products.

     The Markets in Financial Instruments Directive (MiFID) sets a regulatory framework for
      safeguarding the interests of retail clients, whereby financial providers are required to act
      honestly, fairly and professionally in accordance with the best interests of their clients.
      Providers are also required, when offering the service of advice, to recommend investment
      products or services that are suitable for the client. The study shall focus on the area of
      investment advice for retail investment products covered under MiFID. As such, the MiFID
      legislation, specifically provisions under Directive 2004/39/EC and Directive 2006/73/EC,
      shall be used as a benchmark for assessing the quality and reliability of financial advice to
      consumers.

     The final findings of the study should feed into the MiFID review process, thereby supporting
      the Commission‟s endeavours to develop evidence-based policies in this area. It will also
      contribute to the work the Commission is undertaking on „Packaged Retail Investment
      Products‟ more generally, which aims to provide consistency in the retail investor protection
      measures applying across the different sectors of financial services, to ensure investors are
      always appropriately protected irrespective of the legal form of an investment or how they
      buy it.



  1.2 Study methodology
  Key information source – mystery shopping on financial providers across EU

     The main source of data for this study was obtained through more than 1,200 mystery shops
      conducted across 27 EU Member States. The role of the mystery shopper was to collect
      data on the quality and outcomes of investment advice, by means of face-to-face
      conversations with financial providers (i.e. banks and independent financial advisors).
      Shoppers were to assume the profile of an average consumer, who is not a sophisticated
      investor, with the objective of purchasing a simple low-risk investment product.

     Shoppers are categorised into two main profiles – the “Married Professional” (Scenario One)
      and the “Young Professional” (Scenario 2). Both profiles should represent an average
      consumer with a relatively low-risk appetite. A total of 1,209 shops were conducted across
      27 EU Member States, which ranged from 30 to 50 shops per country.

     While every effort has been made to design and conduct the mystery shops with a view to
      capturing, analysing and measuring both the quantitative and qualitative aspects of the
      advisory process as well as product suitability - limitations in relation to the methodology are
      noted in this section as well as under section 5.

     In relation to the advisory process, for instance, in order to produce measures of its
      effectiveness, the evaluation of the information gathering exercise at the advisors' premises
      is neither straightforward nor exact. Obtaining numerical results requires measurable facts,



                                                                                               Page | 5
    which need to be combined with the more difficult to measure nuances in individual
    judgment and decision-making relating to the giving and receiving of information. Variations
    in individuals' characters (for both shoppers and the advisors) are unavoidable and in the
    context of limited interview time, the potential to explore every aspect of the advisory
    experience is constrained. Similarly, in the case of product suitability, only core aspects of
    product liquidity and risk levels (and not all their features) can be measured within the limits
    of the relatively short mystery shopping engagement.


Framework for assessing results from mystery shopping engagement

   The results of the mystery shopping exercise will be analysed along two broad themes:
    advisory process (whether the advisor undertakes the necessary steps and considerations
    during the advisory process), and product suitability (whether the recommended investment
    product is deemed as „suitable‟ for the consumer, in view of his or her investment objective,
    level of financial knowledge and investment experience, and financial background).

   The analysis of advisory process will be based on the extent to which the advisor met the
    baseline requirements indicated under MiFID, as well as the fulfilment of „practical
    considerations‟, which cover aspects that may not be explicitly specified by MiFID, but may
    provide further insights on whether the underlying guidelines of MiFID were being adhered
    to.


1.3 Key study findings on the advisory process (EU-level)

Assessment of advisory process - due diligence
At the EU-level, most advisors appeared to be fairly proficient in covering a number of baseline
requirements specified under MiFID. However, a closer examination of these efforts shows that
advisors vary in the extent and nature of the information they gather about the shoppers’ profile.
In many cases, limitations in the information gathered in relation to the customers’ financial
needs and background may raise concerns as to the ability of advisors to conduct a proper
process, deliver appropriate advice and/or to develop a customised investment
recommendation.
It is worth mentioning that in 10% of cases, the advisory process did not lead to any
recommendation to the client. Of the recommended products, 33% of them were products to
which the MiFID rules are not applicable.


   Advisors were often only able to gather basic information relating to the shoppers’
    profile. When it came to gathering more in-depth information about the shopper’s
    profile, efforts appeared to be lacking.

    -   At the EU-level, it is observed that less than 10% of advisors adhered to all the
        guidelines that were mapped under MiFID requirements - it can be argued therefore,
        that advisors did not generally adhere to MiFID guidelines with respect to all elements of
        the due diligence exercise. This may be evidenced by the limited information collected
        on the shoppers‟ financial knowledge, investment experience and financial situation.
        MiFID does not, however, set a 'hard' requirement on gathering such information, given
        the need to adapt the collection of information to different situations. Nonetheless, there
        should be sufficient information obtained in order to support the recommendation made.
        Furthermore, given that the mystery shoppers were not 'known' to the firms they
        approached, advisors would still need to undertake a range of steps in order to
        demonstrate the soundness of their recommendations.




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          -    At Member State level, the results appear to be more varied. Overt adherence to the
               variety of possible steps in the due diligence process, to the extent that they are
               necessary so that the shopper‟s investment requirements could be accurately assessed,
               seemed more promising in countries with more developed financial markets, such as the
               UK (23% of advisors), France (17% of advisors) and Finland (16% of advisors). In
               contrast, for countries such as Estonia, Greece, Latvia, Lithuania and Slovenia – none of
               the advisors explicitly took steps that could be seen to relate to each of the MiFID
               requirements. These countries fared significantly below the EU-level average across all
               aspects of due diligence, particularly in assessing the shoppers‟ financial knowledge,
               investment experience, and financial situation.


         Although the shoppers’ risk appetite appeared to have been profiled by most
          advisors, the recording of the profiling process seemed weak in a significant number
          of cases.

          -    Almost 50% of advisors (including those who did not recommend any product or whose
               recommended products were not covered under the scope of MiFID) did not seem to
               record in writing any information about the shoppers‟ risk appetite. In addition, almost
               80% of advisors did not administer a risk profile assessment jointly with the shopper,
               and only 17% of advisors used a rating scale to assess shoppers‟ risk profile.

          -    This suggests that advisors may have addressed MiFID‟s requirements on this aspect in
               a superficial manner, since most did not seem to be very methodical or comprehensive
               in the manner in which they established the shoppers‟ risk profiles. This means the
               establishment of risk appetite was very much left to the interpretation of the advisors,
               thereby increasing the advisors‟ potential bias as well as the legal risk for the firm when
               it comes to classifying the clients‟ risk profiles.


         There is a tendency for most advisors to overlook the shoppers’ education level and
          profession.

          -    When it came to understanding the shoppers‟ financial knowledge and investment
               experience, it was observed that while most advisors had asked about the shoppers‟
               prior investment experience, only a handful covered other MiFID requirements such as
               education level and profession. The implication of this observation may be viewed in the
               context that the advisor could have already assumed the shopper‟s financial background
               at the start of the advisory session, and therefore did not feel it was necessary to ask
               about the shopper‟s profession and education level (note: shoppers only reveal their
               „profession‟ and „education level‟ when asked by the advisor).

          -    The general tendency of advisors to overlook the client‟s education level may pose a
                                          1
               concern as some studies have indicated a possible linkage between education and
               financial capability with regards to choice of investment products (even when other
               characteristics were taken into account).




1
 According to a survey conducted by Financial Services Authority (FSA), „Levels of Financial Capability in the UK‟ (2006), it
was observed that financial capability increases with participants who had made more purchases or had dealt with more
financial products. In addition, scores for financial capability were also found to increase steadily with households who have
higher general education and are older.



                                                                                                                     Page | 7
   Advisors appeared to be more interested in the amount that the shopper is able to
    invest, rather than the shoppers’ ability to finance such investments.

    -   Generally, advisors do not seem to gather adequate information about the shoppers‟
        financial situation – especially with regard to the shoppers‟ financial commitments, as
        well as other regular transactions or expenditures. In contrast, aspects relating to the
        shoppers‟ personal income and assets were relatively better covered.

    -   Interestingly, this observation seems consistent with the finding on the types of
        questions asked by the advisors to establish the shoppers‟ risk profiles – while more
        than 60% of shoppers were queried on their risk-return preferences, only over 30% were
        asked about their ability to deal with investment risk.



Assessment of advisory process - information transparency
Similar to the observation for due diligence, most advisors appeared to have covered the broad
areas specified under MiFID. However, information provision by the advisors seemed to be
rather superficial and often lacked the necessary details in order for the shopper to make a fully
informed investment decision, particularly for fairly complex areas such as investment risk.
Note that transparency requirements relate both to the service being offered by a financial agent
(e.g. advice) and to the products or investments being proposed in relation to that service. In the
latter area, there may be additional requirements which apply to the advisor, so as to ensure
effective product or investment transparency. In the case of UCITS funds, for instance, the
provision of certain ‘investor-friendly’ product information is required by EU law.


   Information provided on product investment risk was not comprehensive and may be
    misleading at times.

    -   Shoppers were generally provided with the risk level of the proposed investments (i.e.
        high, mid, or low investment risk). However, the explanation of risk level appeared to be
        rather vague – most advisors tend to highlight the „low-risk‟ nature of the investment, but
        do not give further explanation to qualify the risk level or had provided descriptions that
        were too general.

    -   While the explanation of risk by the advisor depends to some extent on the feedback he
        receives from the consumer, there were instances where the advisor's descriptions of
        risk could be misleading:

        o   “The level of risk suits your risk profile” (Advisors who made this statement did not
            offer any further explanation as to how the level of investment risk was suitable for
            the shopper, based on his or her profile);

        o   “This fund invests in bonds, which is less risky than equity funds” (Such a statement
            may be misleading because certain bonds, such as junk bonds or non-investment
            grade bonds, may still pose substantial risk to the investor); or

        o   “Investment is low-risk because it is highly diversified” (While diversification may be
            a general strategy for reducing the level of risk exposure, the extent to which risk
            may be potentially mitigated depends on the allocation of investment across types of
            asset classes, industry sectors, geographies, etc. In this case, the advisor made a
            general remark without providing a detailed explanation on the constituents of
            diversification).




                                                                                            Page | 8
   Generally, advisors seemed fairly forthcoming about certain fees and charges related
    to making the investment. However, the limited instances of disclosure relating to
    remuneration fees may be indicative of only partial information transparency and it
    was not clear whether all investment costs (e.g. annual fund management charges)
    were being effectively communicated.


    -   Over 70% of advisors provided some information on fees associated with products and
        services. It should be noted that the qualification of MiFID compliance on this aspect is
        defined in a broad sense. As such, based on Synovate‟s benchmark, the advisor is
        deemed to have met MiFID requirements if he or she has provided some information on
        investment fees / charges since there is no means, in the context of a mystery shopping
        exercise, of determining whether all the „relevant‟ fees have been accounted for (without
        further details on the actual incentives that might be in place for a particular sales
        channel).

    -   Most shoppers were provided with information related to upfront product charges (70%).
        Regarding the remainder of investment fees (e.g. annual fund management charges), it
        was not possible to assess the extent to which such information was provided by the
        advisors. However, the lack of product information being provided implies that this
        crucial information in assessing different investments may not have been disclosed.
        Information on advisors‟ remuneration was not frequently discussed (30%). While it is
        possible that the lack of disclosure on remuneration may be due to the fee structure of
        the investment firm (e.g. fees based on the dispensing of advice, rather than by
        transaction), this may be more of an exception rather than the norm, since it is a rather
        common practice in the retail investment industry not to charge customers directly for
        advice but for customers to pay indirectly through distribution fees, commissions, and
        other inducements, etc.


   Very few advisors mentioned conflicts of interest or inducements during the
    engagement.

    -   Less than 5% of all the advisors talked about aspects such as conflicts of interest and
        inducements. However, the lack of disclosures may not necessarily indicate that 95% of
        behaviours were non-compliant:
        o   Not all investment firms may receive inducements, and as such, the lack of
            disclosure need not necessarily indicate the violation of MiFID regulation. On the
            other hand, the reception of inducements may be common for certain products or
            markets – consequently, a common lack of disclosure might be indicative of
            potential violation of the relevant rules.
        o   In addition, investment firms have to establish and adopt procedures and policies to
            effectively manage conflicts of interest. While a general description of the conflict
            policy has to be provided to clients, a more specific disclosure is only needed when
            organisational or administrative arrangements made by the investment firm to
            manage conflicts are not sufficient to ensure that risks of damage to client interests
            will be prevented. As such, the lack of disclosure concerning specific situations of
            conflicts of interest by firm may mean that they are satisfied with the effectiveness of
            the measures adopted to manage conflicts. Of course, the firm‟s satisfaction that
            such measures are effective may be misplaced, but it is not the role of disclosure to
            address such an issue. Disclosure could, to a limited extent, help investors
            understand potential problems of which they may be unaware.




                                                                                             Page | 9
    -   While shoppers were required to pose general questions to the advisor regarding
        possible inducements (“Do you receive any incentive for the recommended products?”),
        the information obtained from this discussion was rather limited as in most instances,
        advisors seemed reluctant to discuss about their commission relating to the investment
        transaction.

    -   In view of the considerations mentioned above, the study can only draw partial
        conclusions on the firm‟s adherence to MiFID‟s requirements regarding inducements or
        conflicts of interest. This is because an accurate assessment will require a more in-
        depth knowledge of the firm‟s internal arrangements and policies, as well as its relations
        with other firms with regard to the proposed investment products. Furthermore, as
        noted, MiFID‟s requirements mostly relate to the internal procedures in a firm and the
        effectiveness of these procedures in mitigating potential conflicts of interest – rather than
        on the disclosure of such conflicts to clients (which is a conditional requirement,
        depending on the firm‟s effectiveness in managing such conflicts).

    -   However, given that only a handful of advisors had touched on inducements and
        conflicts of interest, the study could infer that it is likely that a number of firms may have
        failed to comply with MiFID requirements in these aspects, since it seems highly
        improbable that almost all firms do not receive inducements from third parties, or have
        sufficiently managed all conflicts of interest.



   While advisors were not observed to be entirely comprehensive, they were generally
    perceived to be fairly proactive and unbiased in their information provision.

    -   This assessment may be objectively observed from the use of comparisons, where
        majority of advisors (who highlighted such comparisons) would substantiate
        performance benchmarks (i.e. past or forecast performance) with the necessary
        assumptions or caveats as required under MiFID.

    -   From the shoppers‟ feedback:
        o   80% felt that their advisors had checked on their understanding of the information
            provided during the engagement session.
        o   About 70% felt that their advisors had volunteered information during the
            engagement session.
        o   Almost 90% felt the information provided by the advisors were clear and easy to
            understand.
    -   However, the shoppers‟ personal evaluation is necessarily subjective as the existence of
        information asymmetry between the advisor and the average investor means that
        consumers may face a high risk of receiving unreliable or incorrect advice even without
        recognising it. Concurrently, shoppers may not be aware if important information was
        omitted by the advisor.




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     1.4 Key study findings on product suitability (EU-level)

     Overview of investment recommendations

         Overall, there were 1,084 recommendations. Of these:
          -    Almost 67% or 725 investment recommendations were for products that are covered
               under the scope of MiFID.
          -    The remaining 33% or 359 shoppers received recommendations for products that are
               not covered under MiFID, such as investment-linked insurance plans and savings
               accounts.

         Investment funds appeared to be the most popular product category, accounting for about
          50% of total recommendations. The distribution of remaining products were as follow:

          -    Alternative investments (e.g. commodity futures): 2.9% of recommendations
          -    Stocks: 0.7% of recommendations
          -    Bonds: 7.8% of recommendations
          -    Structured products: 5.2% of recommendations
          -    Investment funds: 50.3% of recommendations
          -    Insurance plans: 18.7% of recommendations
          -    Savings accounts: 14.4% of recommendations


     Assessment of investment suitability (for recommendations covered under MiFID)

         About 43% of products can be deemed to be broadly „suitable‟ under a relatively simple
          rubric (i.e. basically fulfils shoppers‟ needs in terms of investment liquidity and risk level) –
          while the remaining 57% were assessed as broadly „unsuitable‟ under a relatively simple
          rubric (i.e. did not fulfil shoppers‟ needs in terms of investment liquidity and risk level).

         The main driver of „unsuitability‟ was the relatively high level of investment risk of the
          proposed products (which accounted for over 80% of „unsuitable‟ cases):
          -    Most products are deemed to be relatively liquid in terms of fulfilling the shoppers‟
               desired investment duration – about 90% of recommended products have either no
               maturity period or a maturity period of 5 years or less2.
          -    Despite the fact that the shopping scenarios were designed to focus on lower risk
               products, a significant number of recommendations were for products that were deemed
               to be risky3:


2
  For the purpose of this study, product liquidity is defined by whether the financial product‟s maturity date, where such exists,
is aligned with the person‟s desired length of investment (which has been defined as 5 years for the mystery shopping
scenarios). For products which have maturity periods beyond that of the investor‟s desired timeframe, but do not impose any
penalties for early withdrawal, the study considers such investments to be relatively liquid but also recognizes that the
investor may be exposed to liquidity risks (for example, the investor may not be able to recoup his capital if there are any
fluctuations to his investment before the product maturity period). Another aspect of investment liquidity is the ease in which a
product can be converted into cash, or the potential volatility in investment value, upon the sale of the investment product.
However, for the purpose of assessing product suitability, the analysis framework had excluded these considerations of
liquidity as these aspects may not be directly measurable through the mystery shopping engagement.

3
  Risk exposure refers to the potential volatility of investment value and may be measured by whether the investment capital
is protected or whether the investment returns are guaranteed (and to what extent), as well as whether the underlying assets
which make up the investment, are inherently risky. For the purpose of this study, „secure assets‟ are defined as government
/ investment-grade bonds, and/or cash equivalents; whereas „high-risk assets‟ are defined as stocks and non-investment-
grade bonds. For funds, an investment is deemed to be relatively „safe‟ if the total contribution of secure assets comprises



                                                                                                                       Page | 11
               o    About 80% of risky products were investment funds, specifically equity funds and
                    „mixed‟ funds4. A significant number of „mixed‟ funds were deemed to be „high-risk‟ -
                    over 30% had portfolios comprising 70% (or more) of risky assets (such as stocks,
                    non-investment grade bonds, etc).


               o    Only 20% of investment recommendations provided capital protection (however, it is
                    not necessary to have such protection in order to qualify a recommendation as
                    being suitable). Even then, it was noted that 24% of such products have maturity
                    periods which were longer than the shoppers‟ desired time frame of 5 years – this
                    means the consumer may still stand to lose their capital should they withdraw their
                    investment before the fund‟s maturity period.

     Assessment of product suitability by EU Member States

         The occurrence of unsuitable investment recommendations appears to be varied across EU
          Member States. It was generally observed that countries with especially high incidence of
          „unsuitable product recommendations‟ tend to be the ones with more developed financial
          industries. Examples: Denmark (68%), Finland (56%), Netherlands (52%), Sweden (58%),
          UK (55%).


         In contrast, there were also countries which tend to recommend „safe‟ investments such as
          savings accounts (despite the fact that the shopper scenarios were designed to steer
          advisors towards MiFID investments). This was especially evident in countries such as
          Cyprus, Greece and Spain, where the contribution of savings accounts over total
          recommendations were 54%, 37% and 44% respectively.

     Assessment of product suitability by scenarios

         Generally, there is no significant difference in the occurrence of suitable / unsuitable
          investment recommendations between the two mystery shopping scenarios (i.e. married
          professional and single professional). Shoppers in both scenarios received similar
          recommendations in terms of level of investment risk and product liquidity.

     Assessment of product suitability by types of financial players

         It was generally observed that independent financial advisors (IFAs) tend to propose riskier
          investments compared to banks (about 72% of MiFID products recommended by IFAs were
          deemed as relatively high risk, compared to 53% for banks).


         It was also noted that banks tend to propose their own investment products (which account
          for 80% of their recommendations), rather than products from third-party financial entities.
          Conversely, 83% of the investments recommended by IFAs tend to be products from other
          financial players. Since the study does not have privy to the internal incentive structures of
          individual financial entities (to assess the impact of commission on the advisors‟ investment
          recommendations), it may be partially inferred that banks may be constrained in their
          flexibility to offer suitable investment options, due to their limited product range. By the same



70% (or more) of its overall asset composition, or relatively „risky‟ if the total contribution of high-risk assets comprises more
than 30% of its overall asset composition.

4
 Mixed funds are funds which hold different asset classes within their investment portfolio (versus bond funds, which
comprise mainly bonds; or equity funds, which usually comprise mainly stocks).



                                                                                                                       Page | 12
          token, financial advisors may have a higher propensity to introduce suitable investments, as
          they would typically have a wider range of products to choose from.



     1.5 Assessing the underlying causes of poor product suitability (EU-level)
         Despite the observed limitations in the collection of client information by advisors, over 40%
          of investment recommendations were deemed to be suitable. Interestingly, there was no
          significant difference to which advisors followed the MiFID guidelines, between those who
          proposed suitable investments and those who proposed unsuitable investments. This
          observation is generally consistent with findings across scenarios, types of investment
          products, financial players, and EU Member States.


         This suggests that in a number of cases, the advisors‟ investment recommendation may
          have been influenced by other biases:
          -    As mentioned above, it was observed that a significant number of advisors had
               recommended investments carried by their own banks. In some instances, it is possible
               that advisors who recommended „unsuitable products‟ may have done so because they
               were limited by the range of products carried by their firms, rather than as a result of an
               in-depth understanding of the shoppers‟ investment needs and profiles. Likewise,
               advisors who proposed „unsuitable investments‟ may have been constrained by the
               available pool of products offered by their firms (which was also illustrated in a recent
               survey conducted by Italian consumer organization, Altroconsumo, where it was
               observed that advisors tend to recommend products offered by their own banks,
               regardless of their clients‟ financial and risk profiles) 5.
          -    In some countries, advisors could have been generally cautious in their product
               recommendations, as illustrated by the high incidence of savings accounts being
               proposed in countries such as Cyprus, Greece and Spain.
          -    Conversely, advisors who proposed unsuitable products, despite exercising greater
               diligence during the advisory process, may have applied their own judgement on what
               constitutes a „suitable investment‟, based on their interpretation of the shopper‟s profile.


         In view of the points above, the study also notes that the advisory engagement should not
          be viewed as a „checklist‟ of MiFID guidelines, having considered that the actual diagnosis of
          „investment suitability‟ is a complex and relatively cognitive process, subject to the advisor‟s
          own personal experience and judgement. It is foreseeable that an advisor might have
          fulfilled all the required MiFID requirements (from a process perspective) and yet fails to
          arrive at a suitable recommendation.


         However, this does not suggest that the advisory process is redundant in preventing „market
          failure‟, since by adhering to such guidelines, advisors are at least covering the baseline
          prerequisites for effective information gathering. The fact that a significant number of
          advisors failed to conduct a comprehensive and analytical collection of client information
          suggests that most advisors may not have even obtained an adequate baseline
          understanding about their clients.



5
  The survey conducted by Altroconsumo was done across 80 branches of leading Italian banks in Milan, Turin and Rome.
The survey results indicated that the banks‟ adherence to MiFID had been generally insufficient (for example, the assessment
of risk profiles was found to be inadequate - only a few bank branches had requested their clients to complete a formal
questionnaire on this aspect). Investment proposals were found to be generally unsuitable and seem to be skewed towards
products offered by the bank, rather than being grounded on the client‟s needs and profile.



                                                                                                                  Page | 13
2. Introduction
The purpose of this chapter is to provide an overview of the study context, objectives and project
tasks, as well as to explain the key information sources which will be utilised throughout the study.


2.1 Study context

The context to the study stemmed from growing concerns within the EU regarding the quality and
reliability of financial advice in the field of retail investment. This has prompted the Commission to
initiate a study to examine the current state of retail investment advice across the EU Member
States, and specifically, to evaluate whether current advisory practices are in line with current
legislative frameworks (namely, the Markets in Financial Instruments Directive).

Growing concerns about the quality and reliability of financial advice

The Commission has been aware of consumer concerns in the area of financial advice, particularly
since the start of the financial crisis. These concerns were evidenced by findings from recent studies
and mystery shopping exercises conducted by some of the EU Member States.

Unsuitable financial advice has significant impact on investor losses and investor confidence. For
example, a study in Germany indicated that consumers terminate 50 to 80% of all long-term
investments prematurely because of unsuitable advice when buying financial products. This leads to
                                                                   6
estimated damages for consumers of 20-30 billion Euros every year .

The issue of unsuitable advice may be symptomatic of a wider problem within the EU. For example,
recent data provided to the EU Commission by the FIN-NET network7 showed an increase in the
number of complaints relating to financial advice on investment products, specifically in Italy 8,
Ireland9, France10, and Belgium11.


Assessing investment advice under the Markets in Financial Instruments Directive

The provision of advice to retail clients on various investment products is generally covered in the
EU through several legislative measures.

Of these measures, the most recent and comprehensive legislative framework is provided by the
Directive 2004/39/EC of the Markets in Financial Instruments Directive (MiFID). This directive
governs the provision of investments services relating to financial instruments by investment firms
and credit institutions. However, there are also investment products, such as insurance policies,
some banking products, and other products whose sale is accompanied by professional advice,
which are not covered under MiFID.



6
Study of Evers and Jung, Anforderungen an Finanzvermittler, September 2008, launched by the German Consumer Affairs
Ministry
7
  FIN-NET is a financial dispute resolution network of national out-of-court complaint schemes (launched by the Commission
in 2001). Following a Commission request, the FIN-NET network provided data on the complaints concerning advice on
financial products received respectively in 2007, 2008 and the first half of 2009.
8
    In Italy, 95 complaints were reported for 2007, 63 for 2008 and 81 for the first half of 2009.
9
    In Ireland, 384 complaints were reported for 2007, 1,039 for 2008 and 860 for the first half of 2009.
10
     In France, 78 complaints were reported for 2007, 294 for 2008 and 234 for the first half of 2009.
11
     In Brussels, 62 complaints were reported for 2007, 100 for 2008 and 103 for the first half of 2009.




                                                                                                                Page | 14
MiFID sets the regulatory framework for safeguarding the interests of retail clients, whereby financial
providers are required to act honestly, fairly and professionally in accordance with the best interests
of their client. Providers are also required, when offering the service of advice, to recommend
investment products or services that are suitable for the client. Specific rules for implementation are
set out in the MiFID Level II Directive 2006/73/EC.

In addition, the Commission has also conducted a broad assessment of the existing EU regulatory
framework in the context of the broader area of Packaged Retail Investment Products (PRIPs).
Following this assessment, the Commission has identified MiFID as a benchmark for future
regulation on PRIPs in the area of selling practices.

Hence, for the purpose of this study, the MiFID legislation, specifically provisions under Directive
2004/39/EC and Directive 2006/73/EC, shall be used as a benchmark for assessing the quality and
reliability of financial advice to consumers.

The study shall also address the practical applications of MiFID to check the way in which rules are
enforced in practice, drawing conclusions where possible regarding the real impact of this measure
in regulating the market.

Where the outcomes intended by MiFID, namely the recommendation of suitable products to
consumers, are not effectively being achieved in practice, the study shall also identify possible
underlying reasons accounting for these outcomes. This should be seen as an indication of areas for
further work.


2.2 Study objectives

The purpose of this study is to evaluate whether advisers across the EU provide suitable investment
advice to retail clients. The study shall focus on the area of investment advice for retail investment
products covered under MiFID.

The overall objective should be attained by means of specific goals:

  i.        To evaluate whether financial advisors observe the relevant MiFID requirements for advice,
            so as to ensure suitable advice for consumers

  ii.       If there is evidence of unsuitable investment advice, the study should identify and explain
            the possible reasons behind recommendations of unsuitable products

The collection of data will be done via a mystery shopping exercise across the EU. The final findings
of the study will be made available to the MiFID review process, and should support the Commission
endeavours to develop policies, particularly in the context of the MiFID, but also more widely in the
context of PRIPs, so as to ensure appropriate regulation of sales processes applies across the
whole retail investment market.


2.3 Specific tasks and deliverables
The study, which forms part of the Commission's framework contract which comprises four main
tasks, as follows:

           Main task 1 (MT1): Study on quality and reliability of advice provided to consumer in the
            market of retail investment services

           Main task 2 (MT2): In-depth consumer opinion surveys on retail investment products




                                                                                               Page | 15
       Main task 3 (MT3): Collection of prices for retail investment products

       Main task 4 (MT4): Mystery shopping study on retail investment products

For the purpose of this specific study, Synovate will focus on Main Task 1 and Main Task 4. Main
Tasks 2 and 3 are not relevant to this exercise, and will not be covered within the scope of the study.


2.3.1 Main task 1 (MT1): Overall study on quality and reliability of advice
provided to consumer in the market of retail investment services
Main Task 1 focuses on providing an understanding on the quality and reliability of advice provided
to consumers in the market of retail investment services.

MT1 will also include profiling of the retail investment market, developing a reasonable
understanding of the retail investment market through survey and research, supplemented with the
opinion of experts and integration of results from the mystery shopping.

Specific sub-tasks will be as follow:

   i. Description, analysis and evaluation of the quality and reliability of advice provided to
      consumer in the market of retail investment services

  ii. Development of a framework for analysis and for presenting results

  iii. Coordination of the different stages and tasks of the study

 iv. Preparation of consultations with stakeholders

  v. Consultation with experts, which will provide advice and analysis on the retail investment
     services market in terms of - preparation of the study, knowledge of the retail investment
     services market, assessment of results in terms of findings, and policy recommendations

Main Task 1 (MT1) – MT1 is the overall convergence of findings within Task 1, and will depend
significantly on outputs of Task 4 (i.e. Mystery Shopping).


2.3.2 Main task 4 (MT4): Mystery shopping study carried out in the market of
retail investment services
Main Task 4 aims to obtain data on the quality and outcomes of investment advice across the EU.
This task requires mystery shoppers to collect data on the quality and outcomes of investment
advice by means of face-to-face conversations.


2.4 Key information sources
Synovate will utilise a combination of information sources to achieve the study objectives. This will
include profiling of the retail investment market, developing a reasonable understanding of the retail
investment market through secondary research, supplemented with opinion of experts, followed by
the integration of results from the mystery shopping exercise (from which the main source of market
insights in this study will be derived).




                                                                                               Page | 16
2.4.1 Secondary research as an information source

Secondary research will be conducted on the retail investment services market to:

  i. Establish an overview of the market structure, key firms and financial channels, and key
     financial products for each EU member state. This is to identify suitable mystery shopping
     targets (in terms of types of financial channels and firms), as well as to determine the
     appropriate allocation of shopper interviews across targets.

  ii. Identify relevant financial product attributes to be measured and evaluated in view of
      the mystery shopping product recommendations. This will comprise the mapping and
      grouping of financial product attributes such as maturity, liquidity, financial risks, etc. The
      research should also include the identification of relevant and comparable risk profiles for the
      various financial products and customer segments.

Market data and country specific data will be collected from various statistical sources, departments
within government bodies in the country, information in public domain, trade journals, EU
publications and EU offices.


2.4.2 Interviews with experts or other relevant stakeholders as an information
source
The study shall also refer to industry expertise / market expertise / country expertise obtained
through past studies in the region / sectors; and with help of the local offices of Synovate across the
Europe.

Findings from secondary research will be shared with relevant experts / stakeholders to gain their
initial feedback. The feedback from experts may be on the following lines, depending on the country,
market and experts‟ knowledge:

   i.   Validation of the direction of findings till this stage, or
  ii.   Could suggest alternative information sources, or
 iii.   Could provide results of any of their findings in the field, or
 iv.    Could provide insights into the policy / regulatory environment, etc.

Synovate has identified the following group of experts to participate in this study:

 Expert profile                        Role in study
 Barbara Baarsma, director and            Advise on functioning of Retail Investment Services
 professor of SEO Economic                 market from an economic perspective
 Research (Market Forces and              Gives her opinion on initial hypothesis on potential
 Competition Issues)                       reasons for recommendation of unsuitable products
                                          Provide guidance on interim findings & final reports
 Alexander Filius, attorney at law,       Advise on functioning of Retail Investment Services
 Industry Group Financial Services         market from a legal (financial law) perspective
 of Holland Van Gijzen LLP
 Ansgar Becker, attorney at law,          Advise on functioning of Retail Investment Services
 heads the Banking & Finance               market from a legal (financial law) perspective
 Team of Ernst & Young Law in
 Germany
 Tony    Smith,    Group    Head,         Advise on functioning of Retail Investment Services
 Financial & Business Services,            market from a financial services perspective
 Synovate UK



                                                                                               Page | 17
2.4.3 Mystery shopping as an information source

a) Scope of mystery shopping engagement
   The study will observe the following definitions in the design of the mystery shopping exercise:

      Retail client – a client who is not a professional client or an eligible counterparty

      Average retail client – a retail client who is reasonably well-informed and reasonably
       observant and circumspect, taking into account social, cultural, and linguistic characteristics

      Investment advice – the provision of a personal recommendation to a client, either upon its
       request or at the initiative of the credit institution or investment firm, in respect of one of
       more transactions relating to financial instruments

      Investment advisor – a person providing the service of investment advice, as defined
       under MiFID. The concept of „investment advisor‟ comprises different distribution channels,
       such as: direct sales by employees of the product manufacturer or intermediated sales by
       investment firms and credit institutions (include the use of tied agents)

      Suitable advice         - provisions of investment advice that results in a personal
       recommendation that is suitable in view of the circumstances of the specific client (definition
       of „suitability‟ is governed by the MiFID Suitability Test, which is detailed in section 3.3
       „Analysis of product suitability‟)


b) Considerations for mystery shopping design

      Scenarios should be based on the needs of an average consumer – Mystery shoppers
       should assume the profile of an average consumer, who is not a sophisticated investor.
       Therefore, the investment objective of this consumer should be to buy a simple low-risk
       investment product (definition of „low-risk‟ products to be described in section 3.3 „Analysis
       of product suitability‟).

      Scenarios should be based on a realistic portrayal of an average consumer – The
       profile of the mystery shopper should be congruent with that of an average consumer for
       each EU state (e.g. in terms of financial background, level of investment knowledge, etc), so
       as to ensure a fair comparison and benchmark for analysis.

      Mystery shoppers should verify whether advisors comply with MiFID obligations
       during the advisory process – Shoppers should be provided with a checklist of requests
       which advisors have to observe under MiFID. They are also required to note down personal
       impressions and additional comments on the behaviour of the advisors.

      Mystery shopping process should identify relevant information to evaluate whether
       shoppers receive suitable advice, specifically a recommendation to buy suitable
       products - The approach should be designed with the objective of ensuring the shopper
       obtain a specific product recommendation from the advisor at the end of the engagement. In
       the case where unsuitable advice was received, the study should identify possible reasons
       affecting the provision of service (e.g. conflicts of interest).




                                                                                               Page | 18
c) Recommended sample size for mystery shopping
  In the recommended sample design, Synovate is mindful of making most efficient use of the
  stated budget while also recognising the Commission‟s preference in terms of covering the 27
  EU Member States.

  The study should supply evidence on the extent to which MiFID has been implemented for each
  Member State in order to provide assessment at an individual market level. Therefore, Synovate
  proposes to cover all Member States in the sample design – however, sample sizes will be
  adjusted to reflect differences in population.

  As such, for larger markets such as France and the UK, Synovate recommends samples sizes
  of 60, whereas for smaller markets such as Slovenia or Luxembourg, the sample size will be
  reduced to 30. These tailored sample sizes will deliver robust indications of progress in each
  market.

  The table below details the proposed sample size per market:

   Country                         Number visits
   Germany (DE)                            60
   France (FR)                             60
   United Kingdom (UK)                     60
   Italy (IT)                              60
   Spain (ES)                              60
   Poland (PL)                             60
   Romania (RO)                            50
   Netherlands (NL)                        50
   Greece (EL)                             50
   Portugal (PT)                           50
   Belgium (BE)                            50
   Czech Republic (CZ)                     50
   Hungary (HU)                            50
   Sweden (SE)                             40
   Austria (AT)                            40
   Bulgaria (BG)                           40
   Denmark (DK)                            40
   Slovakia (SK)                           40
   Finland (FI)                            40
   Ireland (IE)                            40
   Lithuania (LT)                          40
   Latvia (LV)                             30
   Slovenia (SI)                           30
   Estonia (EE)                            30
   Cyprus (CY)                             30
   Luxembourg (LU)                         30
   Malta (MT)                              30




                                                                                        Page | 19
d) Investment products to be covered
       The following listing maps out examples of investment products which are governed under
       MiFID, as well as products which comprise investment components but do not qualify under
       MiFID‟s regulation.

       In the event where non MiFID-qualified products are recommended during mystery shopping,
       Synovate will record the necessary information to assess whether the advisors follow MiFID‟s
       advisory guidelines.

         Products that qualify under MiFID12
         Transferrable securities
         Shares / stock (i.e. Stocks)
         Bonds
         Money-market instruments
         Certificate of deposits (CDs)
         Treasury bills (T-bills)
         Units in collective investment undertakings
         Mutual funds
         Bond funds
         Stocks funds
         Index funds
         Hybrid funds
         Other products
         Structured products
         Options, futures, swaps, forwards, or derivative agreements relating
         to commodities, currencies, etc
         Products that do not qualified under MiFID
         Investment-linked saving accounts
         Investment-linked life insurance policies




12
     Directive 2004/39/EC, Annex 1, Section C




                                                                                           Page | 20
3. Frameworks for assessing the quality and reliability of investment
advice

3.1 Overview of key analysis frameworks

This paragraph describes the methodology, in the form of various analytical frameworks, for the
design and execution of the mystery shopping exercise, as well as the manner in which the findings
will be applied and analyzed.




The following sections will elaborate on each analysis framework in detail.




                                                                                          Page | 21
3.2 Analysis framework for examining the advisory process




The MiFID legislation, particularly Directive 2004/39/EC and Directive 2006/73/EC, defines the
necessary steps and considerations which investment firms need to adhere to during the advisory
process, in order to safeguard the interests of the consumer.

As such, the analysis of advisory process will be based on the extent to which investment firms
comply with the provisions prescribed by MiFID (during the mystery shopping engagement).


Guidelines as specified by MiFID
The broad objectives of MiFID obligations relating to the required measures to be observed during
an advisory process may be summarised under the following themes:

  i. Due diligence (information gathering by the advisor)

     Investment firms should obtain sufficient information about the client during the advisory
     process, so as to ensure an adequate fact-base for advisor in making a suitable investment
     recommendation.

  ii. Transparency and comprehensiveness of financial advice (information provided by the
      advisor)

       a) Comprehensiveness of information: Investment firms should provide the relevant
          information to the client during the advisory process, and should also ensure that the
          information is conveyed in a comprehensible form to clients

       b) Clarity of information: Investment firms should ensure that the information provided is
          deemed as fair, clear, and not misleading

     Such information provision is important in helping the consumer understand the nature and
     risks of the investment service and recommended financial product(s), and consequently to be
     able to make an investment decision on an informed basis.

An elaboration of specific MiFID provisions for the above mentioned themes will be detailed in the
analysis framework (described below). These provisions will form the baseline of key areas which
the mystery shopper should observe for during the advisory process.




                                                                                          Page | 22
Practical considerations
While MiFID provides a general guideline in terms of required obligations, the study also recognises
that some provisions may be broadly defined, and may therefore require further interpretation or
elaboration to assess if the desired MiFID objectives are being achieved during the advisory
process.

Such practical considerations will be identified by Synovate during the development of the analysis
frameworks, based on findings from secondary research literature and consultation with industry
experts.


Treatment of non-MiFID products
The study shall also take into consideration the suitability of non-MiFID products (such as
investment-linked insurance plans or savings accounts), since some of these products may
comprise investment components and may therefore be deemed as possible investment options for
consumers.

However, the study of such products shall be limited to the assessment of the advisory process – the
evaluation of product suitability will be excluded in this case since these products are not governed
under MiFID. For example, the mediation of insurance products is regulated by the Insurance
Mediation Directive (IMD).




                                                                                             Page | 23
Considerations for analysing the advisory process

   i. Due diligence - Types of questions asked by the advisor in order to
      understand relevant investments that may be suitable for the client
   Guidelines as specified by MiFID

    MiFID references           Provisions governing the advisory process

    Client’s investment
                                  Information to assess client’s investment objectives,
    objectives
                                   which should include:
    Article 35 of Directive        -   Length of time client wishes to hold the investment
    2006/73/EC
                                   -   Client‟s risk profile and preferences regarding risk taking
    Article 19(4) of               -   Purpose of investment
    Directive 2004/39/EC
    Client’s level of
                                  Information to assess if the client has the necessary
    financial knowledge
                                   experience and knowledge to understand the complexity
    and investment
                                   and risks involved in the transaction
    experience
                                   -   Types of service, transaction and financial instrument with
    Article 35 and 37 of               which the client is familiar
    Directive 2006/73/EC
                                   -   The nature, volume, and frequency of the client‟s
    Article 19(4) and (5) of           transactions in financial instruments, and the period over
                                       which they have been carried out
    Directive 2004/39/EC
                                   -   Client‟s education level and profession

    Client’s financial
                                  Information to assess if the client is able financially to bear
    situation
                                   any related investments consistent with his investment
                                   objectives. Types of information should include:
    Article 35 of Directive
    2006/73/EC                     -   Source and extent of client‟s regular income
                                   -   Client‟s assets, including liquid assets, investments and
    Article 19(4) of
                                       property
    Directive 2004/39/EC
                                   -   Client‟s regular financial commitments




   Note:
   The evaluation of the above mentioned parameters is referred by MiFID as the Suitability Test.
   According to Article 35 (5) of Directive 2006/73/EC, where the firm does not, or cannot, obtain
   the necessary information to assess suitability, then it should not make any recommendation to
   the client.




                                                                                              Page | 24
     Practical considerations for mystery shopping and analysis

     In particular, the shopper should note if the advisor‟s questioning is comprehensive or specific
     enough to establish an accurate profile of his or her investment needs.

     In a study13 conducted in 2007 to assess the financial advice provided by German banks to retail
     clients, one of the reasons attributed to the failure of market regulation was that there were no
     defined guidelines stipulating how and what information advisors have to collect. In reality, an
     advisor could ask leading or vague questions which may bias the client‟s response, hence
     resulting in an inaccurate client assessment. For example advisors may ask general questions
     about the client‟s financial knowledge which could lead to subjective self-assessments towards
     certain investments (e.g. “Are you familiar with stocks?”).

     In view of this, specific attention should be paid to the following areas:

          Advisor’s general format for gathering data. This is to assess the comprehensiveness in
           which the advisor obtains and records data from the client (i.e. whether the shopper is asked
           to fill up a form / complete questionnaire, or is merely questioned verbally).

          Advisor’s thoroughness in assessing the client’s risk profile. Risk profile in this case is
           defined as a person‟s level of comfort with various ranges of investment volatility or
           preferences towards various risk-return investment scenarios. Generally, an advisor should
           be able to assess client‟s risk profile, which may be defined by his or her level of risk-return
           preference.

           While different firms may have their own criteria, a typical assessment should include a set
           of questions relating to the client‟s responses towards various scenarios of investment
           volatility, as well as expected course of action should there be any changes in the value of
           investment (e.g. sell, hold, or increase investment).

           Relating to the above point on the advisor‟s format for data gathering, the study shall
           therefore assess if a structured questionnaire has been administered by the advisor to
           assess the shopper‟s risk profile.

           In addition, the shopper shall also comment the extent to which they perceive the advisor to
           be comprehensive with his or her data gathering.


     Potential limitations relating to mystery shopping analysis and broader study implications

          Consumers may not be clear about their own investment objectives: In reality, advisors
           may find it difficult to discern their clients‟ investment objectives, as it is possible that
           consumers may not have sufficiently thought through their investment needs and
           preferences prior to the advisory session8.

           Furthermore, given the complexity of information requirements, consumers may not always
           provide accurate information regarding their own financial needs and situation (e.g. the
           consumer may over or under estimate his or her expenses) – which may in turn hamper the
           advisor‟s ability to provide suitable customised recommendations.




13
  Andreas Oehler & Daniel Kohlert, „Financial Advice Giving and Taking - Where are the Market‟s Self-healing Powers and a
Functioning Legal Framework When We Need Them?‟, 9 June 2009




                                                                                                                Page | 25
Summary of framework for evaluating due diligence




                                                    Page | 26
ii. Transparency and comprehensiveness of financial advice
 a) Comprehensiveness of information provided to consumer
 Guidelines as specified by MiFID

 MiFID references           Provisions governing the advisory process

 General requirements
                               The firm should provide the following information to the
 for information
                                client in a durable medium or by means of a web site:
 provided to clients
                                -   Information about the investment firm
 Article 29 of Directive
 2006/73/EC                     -   Information about financial instruments
                                -   Information about costs and associated charges
 First indent of Article
 19(3) of Directive
 2004/39/EC
 Information about the
                               Name and address of investment firm
 investment firm
                                Including the name and contact address of the competent
                                authority that has authorised it, and the necessary contact
 Article 30 of Directive
                                details.
 2006/73/EC

 First indent of Article
 19(3) of Directive
 2004/39/EC
 Information about
                               Description of the nature and risks of financial products
 financial instruments
                                This should include an explanation on the nature of specific type
                                of product concerned, as well as the risks particular to the
 Article 31 of Directive
                                specific type of product, in sufficient detail to enable client to
 2006/73/EC
                                make an informed investment decision
 Second indent of              Explanation of risks (associated with financial product)
 Article 19(3) of
                                -   Volatility of price of financial product / possible limitations on
 Directive 2004/39/EC
                                    the available market for such products
                                -   Types of financial commitments or additional obligations as
                                    a result of transactions in such products
                                -   Description of components and associated risks underlying
                                    financial products that comprise two or more different
                                    products or services
                                -   Other types of risks (e.g. risk of losing entire investment)

 Information about
                               Total price to be paid by the client, including:
 costs and associated
 charges                        -   All related fees, commissions, charges, and expenses

 Article 33 of Directive        -   All taxes payable via the firm
 2006/73/EC                     -   Basis for calculating the total price

 Fourth indent of Article       -   Currency (including any part of the total price which is to be
 19(3) of Directive                 paid in foreign currency, and applicable currency
 2004/39/EC                         conversation rates and costs)




                                                                                               Page | 27
                                           -    Arrangements for payment

       Conflicts of interest
                                          Disclosures on conflicts of interests
       and inducements
                                           -    Firms are to take all reasonable steps to identify conflicts of
       Article 21 of Directive                  interest in the course of providing any investment and/or
       2006/73/EC                               ancillary services. Where organisational or administrative
                                                arrangements made by the firm to manage conflicts of
       Article 18 of Directive                  interest are not sufficient to ensure, with reasonable
       2004/39/EC                               confidence, that risks of damage to client interests will be
                                                prevented, the firm shall clearly disclose the general nature
                                                and/or sources of conflicts of interest to the client before
                                                undertaking business on its behalf.
                                          Disclosures on inducements
       Article 26 of Directive
       2006/73/EC                          -    Where the firm receives fees, commission, or non-monetary
                                                benefits, the firm is required to disclose the essential terms
       Article 19(1) of                         of the arrangements relating to such inducements to the
       Directive 2004/39/EC                     client in a summary form (provided that it undertakes to
                                                disclose further details at the request of the client and
                                                provided that it honours that undertaking).




     Practical considerations for mystery shopping and analysis

     Discussions with industry experts14 have also highlighted the following considerations as potential
     factors in determining the level of information „transparency‟ during the advisory process:

             Level of comprehensiveness in the information provided by the advisor, particularly,
              whether the description of product financial risks is sufficiently detailed to help the
              consumer understand and appreciate his or her risk exposure.

              This is especially so since an „average consumer‟ is unlikely to have in-depth knowledge
              regarding the various considerations related to investment risks. Furthermore, most
              consumers may not be sufficiently aware of the extent of risk exposure to their investment.
              As such, consumers with less knowledge or investment experience will be more
              dependent on the advisor to provide him or her with the necessary information in order to
              make an informed investment decision.

              For example, a prior study15 conducted by the Commission on consumers‟ purchase
              behaviours towards retail investment services revealed that a significant number of
              investors in stocks and shares believe that they receive a fixed or guaranteed rate of
              return on their investment (which is inconsistent with the results of investors who are more
              well-informed).




14
     SEO Economic Research; Holland Van Gijzen LLP (Industry Group Financial Services)
15
     The study on Consumer Decision-Making in Retail Investment Services (2009), conducted by the Commission, showed that
     one in four investors in stocks and shares believe they receive a fixed rate of return or a guaranteed minimum rate.




                                                                                                               Page | 28
               In some cases16, consumers may have wrongly assumed their capital sum invested to be
               protected, especially when the product is described as “a guaranteed fund” (when in
               reality, it was not). Consumers may also be unclear about the method in which their
               investments are being financed, and as such, they may underestimate the potential
               downside of their investments.

               The description of product financial risks may include:

                   Explanation of investment risks, such as:
                    - The extent and probability to which the value of investment may fluctuate
                    - The possibility of the customer losing the entire investment capital
                    - Additional financial commitments and obligations required of the investment

                   Level of investment risk – Whether the investment risk for the recommended
                    product(s) is defined as „high‟, „mid‟, or „low‟, and whether there are comparative
                    benchmarks to provide a context to such a risk assessment (e.g. level of investment
                    risk is comparable to that of savings accounts).

              Openness, which refers to the extent to which the information is „volunteered‟ by the
               advisor (without probing from the shopper). Given that the average consumer is likely to
               have limited financial knowledge and therefore may not be savvy in his or her line of
               questioning, the onus is on the advisor to be proactive in providing all information that is
               relevant to the client‟s investment decision.


     Potential limitations relating to mystery shopping analysis and broader study implications

              Absence of disclosures may not be indicative of conflicts of interest: According to
               MiFID (Article 26 of Directive 2006/73/EC), advisors are obliged to disclose the existence,
               nature, and amount of inducements (i.e. fees, commission, or non-monetary benefit
               received by a firm in connection with the provision of investment services), if the receipt of
               such incentives may impair the firm‟s duty to act in the client‟s best interest. In some
               situations, advisors may deliberately choose to omit such information during the advisory
               session. However, the absence of such disclosures may not necessarily be indicative of
               conflicts of interest as the following scenarios may arise:

                   Inducements do not give rise to conflicts of interest

                   Advisors may not be aware of the firm‟s arrangements regarding inducements or
                    conflicts of interest

               As such, the study will not be able to draw any conclusions in situations where no conflicts
               of interest or inducements were mentioned by the advisor.




16
     Financial Services Ombudsman‟s annual report in 2009 described a case where an elderly couple invested it in a Managed
     Fund, having been advised to do so by an investment advisor at their Bank. They brought a complaint to the Ombudsman
     when there was a serious fall in the value of their investment, on grounds that the Bank was negligent in selling them the
     product where the capital sum was not guaranteed as they thought it was. In another case, a couple who invested
     €150,000 in a geared property fund found that after three years, their investment was worth less than €40,000.
     Ombudsman concluded that the Bank had wrongfully failed to disclose the potential volatility associated with the geared
     nature of the fund to the couple.




                                                                                                                     Page | 29
              Consumers may not respond appropriately to the disclosure of conflicts of interest:
               Some studies17 have shown that consumers may be naive about the impact of conflicts of
               interest on the quality of advice. For example, some experimental evidence 18 suggests that
               investors may still follow the advisors‟ recommendations blindly and may not be
               sufficiently wary despite being informed about conflicts of interest.

              Quality of investment decision may be limited by consumers’ ability to absorb all
               the relevant information provided by the advisor: Given the wide array of financial
               products as well as general complexity of investment decisions, consumers may be
               overloaded with too much information during the advisory session. For example, the
               consumer may not be able to remember or correctly perceive all the information provided
               to him or her by the advisor, especially within a limited time span. In some situations,
               consumers may not even be interested hear about all the necessary details relating to the
               investment decision.




17
     Malmendier and Shanthikumar (2007) and Hong et al. (2008)

18
      In Cain et al. (2005), participants are paid for the precision of the estimates of the number of coins in a jar. They can rely
     on the additional judgment of an advisor, who can closely inspect the jar. While in a first treatment advisors are paid for the
     accuracy of the participants' guesses, in a second treatment they are paid more when the guess is high. The estimate of
     the participants is 28% higher in the second treatment.



                                                                                                                          Page | 30
Summary of framework for evaluating transparency – Information to be provided to the client

(a) Comprehensiveness of information provision




                                                                                    Page | 31
iii. Transparency and comprehensiveness of financial advice
 b) Clarity of information provided to consumer
  Guidelines as specified by MiFID

  MiFID references          Provisions governing the advisory process

  General guidelines on
                               Ensuring that information is fair, clear, and not misleading
  information provision
                                -   Information should not emphasise any potential benefits of
  Article 27 of Directive           a financial product or service without also giving a fair and
  2006/73/EC                        prominent indication of relevant risks
                                -   Information should be presented in a way that is likely to be
  Article 19(2) of
                                    understood by an „average consumer‟
  Directive 2004/39/EC
                                -   Information should not disguise or diminish important
                                    terms, statements, or warnings

  Specific guidelines
                               On comparisons with other financial products or services:
  on information
  provision                     -   Comparison must be meaningful and presented in a fair
                                    and balanced way
  Article 27 of Directive
                                -   Sources of the information used for comparison must be
  2006/73/EC
                                    specified
  Article 19(2) of              -   Key facts and assumptions used to make the comparison
  Directive 2004/39/EC              must be included
                               On past performances of a financial product, service or
                                index:
                                -   Information to cover the immediately preceding 5 years, or
                                    the whole period for which the financial product has been
                                    offered
                                -   Information must clearly state the reference period and
                                    source of information
                                -   Information must contain a prominent warning that the
                                    figures refer to past performance, which may not be a
                                    reliable indicator of future results
                                -   Information must clearly state the currency for any figures
                                    denominated in foreign currency, with a warning that the
                                    return may increase or decrease as a result of currency
                                    fluctuation
                                -   Information must disclose the effects of commissions, fees,
                                    or other charges, for indications that are based on gross
                                    performances
                                -   Description of components and associated risks underlying
                                    financial products that comprise two or more different
                                    products or services
                                -   Other types of risks (e.g. risk of losing entire investment)




                                                                                             Page | 32
                              On future performances of a financial product or service:
                               -   Information must not be based on or refer to stimulated
                                   past performances
                               -   Information must be based on reasonable assumptions,
                                   supported by objective data
                               -   Information must contain a prominent warning that such
                                   forecasts may not be a reliable indicator of future
                                   performance
                               -   Information must disclose the effects of commissions, fees,
                                   or other charges, for indications that are based on gross
                                   performances




Practical considerations for mystery shopping and analysis

        Assessment of information clarity. A key aspect in analysing the quality of financial
         advice is to assess if the information provided by the advisor may be easily understood
         by an average consumer. This is based on the consideration that financial services are
         relatively complex products and the assumption that the average consumer is likely to
         have limited financial knowledge.

         As such, the mystery shopper will be asked to assess if the information provided by the
         advisor was presented in a manner that was clear and easy to understand (e.g. advice
         should be relatively free of financial jargons)

        Assessment of information biasness. The mystery shopper will be asked to note if
         the information provided by the advisor is deemed to be presented in a fair way (i.e.
         whether the views may be one sided in favour of specific benefits or risks).

         Should the advisor provide information relating to any past product performances or
         forecasts, or comparisons with other similar products, the mystery shopper will note if
         such figures are substantiated with suitable assumptions or caveats (as indicated in the
         above mentioned MiFID provisions).




                                                                                         Page | 33
Summary of framework for evaluating transparency – Information to be provided to the client

(b) Clarity of information provision




                                                                                    Page | 34
3.3 Analysis of product suitability




While section 3.2 examines the advisory engagement from a process perspective, section 3.3 aims
to address the suitability of recommended products with regard to the needs of the consumer.

The assessment of suitability shall take into consideration:

   MiFID suitability test: The definition of a suitable product, as governed under MiFID

   Consumer profiles and scenarios: The client‟s investment needs and financial situation, which
    will be conveyed in the mystery shopping consumer profiles and scenarios

   Advisor’s product recommendation: The features of the recommended product, which will be
    measured against the requirements prescribed in the MiFID suitability test, as well as evaluated
    in the context of the client‟s investment needs and financial situation


Analysis of product suitability - The MiFID suitability test
The general principles for the assessment of product suitability are provided by the MiFID „suitability
test‟, which is described in Article 19 (4) of Directive 2004/39/EC and Articles 35 of Directive
2006/73/EC:

   Investment objectives: The product(s) should meet the investment objectives of the client

   Financial situation: The client is able to financially bear the investment risks related to the
    product(s)

   Knowledge and experience: The client has the necessary experience and knowledge to
    understand the risks related to the product(s)


Treatment of non-MiFID products

Non-MiFID products, such as investment-linked insurance plans, investment-linked savings
accounts, etc, shall also be assessed for investment suitability. However, Synovate is mindful about
limiting the exposure of non-MiFID products during the mystery shopping engagement so as to
maintain the study‟s core focus on products and services that are regulated under the scope of
MiFID. The mechanism for limiting the incidence of non-MiFID products will be incorporated into the
design of the mystery shopping scenarios (see section 3).




                                                                                               Page | 35
Analysis of product suitability - Consumer profiles and scenarios
The above components as indicated in the MiFID suitability test will translate into the characteristics
of the mystery shopper profiles and scenarios. The specific shopper profiles to be used as
references for analysis are as defined in the mystery shopping scenarios (section 3 of the report).
The profile will comprise key characteristics that are reflective of an „average consumer‟, so as to
portray a realistic scenario that will elicit an investment recommendation from the financial advisor.

The following diagram illustrates examples of key investor attributes19 which may be used to as
points of reference to help create the profiles of the mystery shopper.

Examples of key investor attributes




Investment objectives

An individual‟s investment objectives may be expressed in terms of his or her desired financial return
versus risk:

         Capital preservation objective: Investors want to minimise their risk of loss. This is a
          strategy generally adopted by strongly risk-averse investors or for funds needed in the short-
          term (such as for tuition payment or down payment on a house). Typically, such investors will
          require their investments to be „protected‟ through some form of guarantee on the capital
          outlay or financial returns.

         Current income objective: Investors want the investment to concentrate on generating
          income rather than capital gains. This strategy is sometimes adopted by investors who want to
          supplement their earnings with income from their investment, in order to meet their living
          expenses (e.g. retirees).

         Total return: The objective is similar to that of capital appreciation (below) in that investors
          want the investment to grow over time to a future need. However, whereas the capital
          appreciation strategy seeks to do this mainly through capital gains, the total return strategy
          achieves this through a combination of capital gains and reinvestment of current income. As
          such, its risk exposure lies between that of current income and capital appreciation strategies.



19
     Investment Analysis Portfolio Management, Seventh edition (Frank K. Reilly and Keith C. Brown); Investopedia




                                                                                                                    Page | 36
     Capital appreciation: Investors want their investment to grow in real terms over time to meet
      some future need, mainly through capital gains. This is typically deemed to be an aggressive
      strategy for investors who are willing to take on risk to meet their longer-term objective (e.g.
      building a retirement or college education fund).


Risk appetite

An individual‟s risk profile conveys the level of investment risk which he or she is willing to accept,
and relates to the individual‟s personal investment styles, which may be broadly described along the
continuum of risk-return preferences. As the definition of investment styles may be subjective, the
following are examples of common industry terms that are used to describe individuals with varying
risk-return levels:

     Conservative: Priority is to safeguard capital; willing to sacrifice returns to minimise risks

     Moderately conservative: Priority is to safeguard capital over the medium to long term;
      willing to accept a small amount of risk

     Balanced: Willing to take moderate short term risk in order to gain longer term capital growth

     Aggressive: Willing to sacrifice capital in pursuit of the highest long term capital growth


Desired length of investment

In general, investors with longer time horizons are able to tolerate greater risks because their funds
are not needed for many years – also, any shortfalls may be recouped with returns over the years.


Current life stage and financial commitment

Generally, an individual‟s net worth and financial needs will change across different life stages, thus
resulting in varying investment objectives and risk propensity over a lifetime. While the impact of life
stage may be subject to an individual‟s personal preference and background, a general view may be
illustrated by the following examples:

     Accumulation phase: This phase is characterised by individuals who are in their early-to-
      middle years of their careers, and typically have relatively small net worth. At this stage,
      individuals are looking to accumulate financial assets to fund longer-term needs (e.g.
      children‟s education, retirement). As they tend to have a longer investment horizon and a
      stream of future earnings, such individuals are able to take on relatively higher risk
      investments (as short-term losses may be evened out in the longer-term).

     Consolidation phase: Individuals in this phase have fairly established careers, and are likely
      to have paid off most of their outstanding debts. As the investment horizon is still relatively
      long, such individuals are able to take on moderately high-risk investments in order to grow
      their wealth. However, they are also concerned about managing excessive risk exposure, so
      as to ensure that their retirement nests are not compromised.

     Spending phase: This phase usually relates to individuals who have already retired. Given
      the limited stream of future earnings, individuals at this stage will be looking to achieve regular
      returns to supplement their living expenses. They may also be more risk averse and are likely
      to be more concerned about capital preservation.




                                                                                                 Page | 37
Investment experience

An individual‟s knowledge and experience in dealing with investment products will determine his or
her ability to comprehend the associated risks with various products. Generally, alternative
investments are deemed to be more complex and are usually associated with higher investment risk.

     Inexperienced investor: No or minimal investment experience

     Moderate investor: Some experience in the investment of relatively low-risk financial
      instruments such as money markets or bonds

     Balanced investor: Some experience in the investment of moderate to high-risk financial
      instruments such as Stocks funds

     Savvy investor: Extensive experience in the investment of various financial instruments,
      including international stocks or alternative investments




                                                                                          Page | 38
Analysis of product suitability - The advisor’s product recommendation

   i.   Considerations in the development                        of analysis      framework        for
        assessing product suitability
       Given the diversity and complexity of financial instruments, Synovate endeavours that the
        assessment should be indicative of product suitability, but not completely exhaustive in
        terms of product evaluation. Investment products may be structured along various
        dimensions, such as types of asset classes (e.g. bonds, stocks, cash equivalents), maturity
        periods, availability of capital protection, etc. Asset classes alone may be further defined by
        geographical or industry sector origin (e.g. emerging market investment fund or healthcare
        investment fund). The variety of assets and ways of getting exposure to these assets,
        coupled with several possible options of structuring products, means that there is little
        homogeneity even within same asset class or product category, which makes it challenging
        to measure the full extent of product „risk‟.

       Furthermore, given the scale of the mystery shopping engagement, the design of the
        analysis framework should take into consideration the potential number of permutations
        which may emerge from the product recommendations across 27 EU member states. As
        such, it will not be feasible to perform an exhaustive investment analysis for each
        recommended product.

       Information availability is likely to be varied across different financial players or types of
        investment products. For example, „stocks‟ may not be further analysed in terms „small-cap
        stocks‟ or „large-cap stocks‟ as this information may not be published for all investment
        products.

       Product evaluation is also subject to the granularity of information which may be obtained by
        the mystery shoppers. In order to maintain a realistic portrayal of an „average‟ consumer
        with limited investment knowledge, mystery shoppers should be mindful about asking overly
        specific or technical questions.


  ii.   Components of analysis framework for assessing product suitability
        Based on prevailing financial literature, Synovate understands the following factors to be
        commonly used for the evaluation of investment product suitability:

   a) Product liquidity

        To simplify the analysis, product liquidity is defined by:

           Whether a product‟s maturity date, where such exists, (i.e. where the principal amount of
            the investment becomes due), is aligned with the person‟s desired length of investment.
            For example, a person who requires regular access to funds in the short term (e.g. 2
            years) may not find it feasible to purchase a structured product with a fixed maturity
            period of 5 years.

           Whether there are penalties or forfeits for early investment withdrawal. For some
            products, the investment returns or capital guarantee may be forfeited if funds are
            withdrawn before the maturity date. Examples of such products are structured deposits
            (where maturities may vary from 2 weeks to as long as 10 years), and fixed deposits
            (where maturities may vary from 1 month to 3 years).




                                                                                               Page | 39
    For products which have maturity periods beyond that of the investor‟s desired
    timeframe, but do not impose any penalties for early withdrawal, the study considers
    such investments to be relatively liquid but also recognizes that the investor may be
    exposed to financial risks (for example, the investor may not be able to recoup his
    capital if there are any fluctuations to his investment before the product maturity period).



 Assessment of recommended product(s):
 - What is the investment maturity period of the recommended product?
 - Is the maturity period longer than the shopper‟s desired investment time frame?
 - Are there any penalties or impact to the investment should the investor opt for earlier
   withdrawal / cash in?




Notes:

Another aspect of investment liquidity is the ease in which a product can be converted into
cash, or the potential volatility in investment value, upon the sale of the investment product.
For example, although mutual funds may be easily traded in the market, an untimely
redemption may result in a potential loss as a period of time is often required for
reinvestment or for the fund to recoup any short-term losses.

For the purpose of assessing product suitability, the analysis framework had excluded these
considerations of liquidity as these aspects may not be directly measurable through the
mystery shopping engagement. For example, it would have been difficult to qualify the
„volatility of investment value‟ (since this may be subject to prevailing market conditions), as
well as „ease of liquidity‟ (since this may be attributed to several factors such as
administrative paper work, resale procedures, etc).




                                                                                        Page | 40
b) Investment risks
   Investment risk is defined by:

      Whether the level of risk exposure is aligned with the person‟s investment objectives
       and risk appetite; as well as appropriate for the person, based on his or her level of
       investment experience / knowledge. For example, high-risk investment products may not
       be suitable for a pre-retirement person, who is likely to face limited or less regular
       earnings in the future and therefore unable to afford short-term losses in the event that
       they need to realise the investment.

   While the level of risk and investment return are often directly correlated (i.e. high return
   usually translates to high risk), it is not within the scope of this study to evaluate the
   appropriateness of a product‟s associated risk in the context of its investment returns
   (furthermore, the assumed shopper profile for this study is one of a low-risk investor).

   Risk exposure refers to the potential volatility of investment value, and may be measured by:

      Whether the investment capital is protected or whether the investment returns are
       guaranteed (and to what extent)

      Whether the underlying assets which make up the investment, are inherently risky (i.e.
       the product‟s asset allocation)

 The assessment of „risk‟ resulting from asset allocation also depends on whether the product
 in reference is a direct investment, or an investment fund:

 a) Direct investments are defined as individual securities owned by the investor, such as
    bond, stocks, derivatives, etc. Asset allocation therefore refers to the product‟s underlying
    security.

 b) Investment funds are portfolios of securities that are professionally managed by an
    investment firm. Asset allocation therefore refers to the composition of underlying
    securities covered within the fund. For example, a mutual fund may comprise various
    types and proportion of securities, such as stocks, bonds, or other financial assets.


 The correlation between asset allocation and investment risk is further elaborated in the
 following sections.




                                                                                         Page | 41
Evaluating investment risk in direct investments

Securities can be generally classified under four major categories of assets, in terms of level of
               20
investment risk :




                                                                                        This classification presents
                                                                                           a general view of the
                                                                                           relative levels of risk
                                                                                         typically associated with
                                                                                          each broad asset class




             Cash and cash equivalents are usually deemed to be the safest investments, but offer
              the lowest return compared to the other asset categories

             Bonds are generally deemed to be less volatile than stocks but offer more modest
              returns. However, the level of risk may vary across different types of bonds. For example,
              high-yield or junk bonds offer high returns similar to stocks but also carry higher risk.

                                                        Bond Characteristics
                 Low risk                                                                                          High risk
                                Shorter maturity           Short to medium            Longer maturity
                                 periods                     maturity periods            periods (2 years
                                Backed by                   (1 year to 2 years)         and above)
                                 governments                Backed by                  Backed by non -
                                Highly liquid               governments and             investment grade
                                                             investment grade            corporations
                                                             corporations
                                E.g. US                    E.g. South Korean          E.g. S&P BB+ and
                                 government 1                10 year bonds,              below rated bonds
                                 year government             S&P AAA rated
                                 bills                       bonds, Moody
                                                             AAA rated bonds

                  Stocks tend to have the greatest risk and highest returns compared to the other asset
                   categories. The risk profile of stocks are determined by the corporation/company that
                   issues the stock, the market where the stock is traded/listed, the currency that the stock
                   is denominated in, and capitalisation of the stock.

                  Alternative investments are generally more complex products, and tend to be more
                   speculative compared to traditional investments such as securities and investment
                   funds. Examples of alternative investments include options, futures, swaps, forwards,
                   or derivative agreements relating to commodities, currencies, etc.




20
     Beginners' Guide to Asset Allocation, Diversification, and Rebalancing, US Securities and Exchange Commission web site




                                                                                                                  Page | 42
Evaluating investment risk in investment funds

The risk profile of investment funds (i.e. mutual funds) will be determined by the proportion and types
of assets structured within the product portfolio. This also applies to products such as an investment-
linked insurance plan, whereby part of the plan‟s premium may be invested in funds.

Based on the benchmarking of financial products offered across various banks, it was observed that
riskier investment funds tend to have higher proportion of equities than bonds or cash equivalents 21.

The following represents a general view* of asset compositions across various risk categories,
                                22
based on Synovate‟s benchmark of typical asset contributions across selected investment
products:




       *Note: Asset composition may vary across similar products, and may include other types of
       assets such as hedge funds, real estate, etc. The definitions of ‘low’, ‘medium’, and ‘high’ risks
       (as mentioned above) may differ across investment products, and should therefore be viewed in
       the context of relative comparison.




21
     ‘The Portfolio Pyramid: How to Diversify Your Investments', Schwab Centre for Financial Research
22
     Benchmark is based on the published profiles of investment products from selected banks




                                                                                                        Page | 43
Example of asset allocation of investment funds from L&G (Barclays), UK23


Product name                                       Income Portfolio Trust                Cautious Portfolio Trust               Balanced Portfolio Trust


Relative risk assessment                     Low-risk                               Mid-risk                               High-risk

Contribution of asset classes           Stocks                       17.3%      Stocks                      40.7%      Stocks                      55.0%

                                        Bonds                        74.4%      Bonds                       39.5%      Bonds                       25.0%

                                        Cash & equivalent             5.8%      Cash & equivalent            4.7%      Cash & equivalent            4.9%

                                        Property                      1.2%      Hedge funds                 10.2%      Hedge funds                 10.3%

                                        Other                         1.4%      Property                     2.9%      Property                     2.9%

                                                                                Other                        2.0%      Other                        1.9%


Example of investment funds from HSBC, UK 24


Product name                               World Selection Cautious Portfolio     World Selection Balanced Portfolio     World Selection Dynamic Portfolio
                                                         Fund                                   Fund                                   Fund

Relative risk assessment                     Low-risk                               Mid-risk                               High-risk


Contribution of asset classes           Stocks                       17.9%      Stocks                      53.8%      Stocks                      70.2%

                                        Bonds                        70.1%      Bonds                       34.4%      Bonds                       20.5%

                                        Cash & equivalent             6.4%      Cash & equivalent            2.4%      Cash & equivalent            2.3%

                                        Property                      1.0%      Property                     1.5%      Property                     3.3%

                                        Other                         4.6%      Other                        7.9%      Other                        3.7%




23
     Barclays Wealth (UK) investment product brochures
24
     HSBC (UK) investment product brochures
Benchmarks for establishing investment risks for the assessment of product suitability

    As the qualification of „risk‟ tends to vary across financial players and investment products, the
     parameters for risk assessment will be broadly based on Synovate‟s benchmark of typical asset
     contributions across selected investment products (assuming all other factors remain equal).

    In both mystery shopping scenarios (i.e. single professional and married professional), the
     assumed consumer profile is that of a so-called conservative investor, who wishes to take on
     relatively „low‟ levels of investment risk and does not wish to pursue higher returns, but prefers to
     make greater investment returns than might be obtained risk-free. In both scenarios, a suitable
     product would be one that is able to generate sufficient returns to meet the shopper‟s investment
     objective, within an „acceptable‟ range of risk:

          -    Single professional scenario: Adequate capital gains / income to meet financial goal of
               buying a house in the future

          -    Married professional scenario: Adequate capital gains / income to supplement existing
               earnings towards saving money for children‟s future

    For the purpose of the mystery shopping analysis, Synovate has defined investment risk as
     either being „acceptable‟ or „unacceptable‟. Given that the objective is to determine product
     suitability, the premise for this approach is that the risk assessment should be indicative, but not
     conclusive. This means that as long as the investment risk does not cross over the stipulated
     risk threshold, it will be deemed as „acceptable‟ (i.e. relatively low risk).

    The definition of „acceptable‟ investment risk will be based on the following considerations:

          -    Presence of capital guarantee: Financial products with capital protection will be
               deemed as „low-risk‟, since the consumer will be at least assured that his or her initial
               investment capital will be fully guaranteed 25. The exceptions to this definition are
               products with maturity periods that extend beyond the scenarios‟ desired investment
               time frame of 5 years – in such cases, the assessment of investment risk will need to
               factor in the potential volatility indicated by the product‟s underlying asset class or asset
               composition (see point below).

          -    Contribution of secure financial assets: Typical asset composition of investment
               products which are generally deemed as „low-risk‟ by banks / investment firms. For
               example, based on Synovate‟s product benchmarks, most „low-risk‟ mutual funds are
               likely to allocate about 70% of their portfolios in relatively „safe‟ assets such as bonds
               and cash / cash equivalents. In addition, the majority of bonds within the portfolio are
               likely to be backed by government or investment-grade corporations.




25
  It is accepted that financial products with capital protection nevertheless imply a premium which the client pays in order to
compensate the advisor offering this insurance. It is also recognised that the addition of this feature may not always be
necessary (for example, when there is no risk that the total cost of the potential capital loss will ever exceed the guarantee
premium, such as with some „capital protection at maturity‟ offers).
Criteria for assessing investment risk

 Types of products     Risk assessment
 Direct investments    Relatively low risk („acceptable‟)

                        Products with capital guarantee
                        Cash & equivalent products
                        Bonds - backed by government or investment grade corporations
                           (e.g. S&P or Moody‟s AAA rating bonds)

                       Relatively high risk („unacceptable‟)

                        Bonds – non-investment grade (e.g. high yield / junk bonds)
                        Stocks (returns are not guaranteed and are subject to fluctuation)
                        Alternative investments, such as hedge funds (generally deemed to
                           be complex products and are therefore unsuitable for inexperienced
                           investors)

 Investment funds      Relatively low risk („acceptable‟)

                        Products with capital guarantee
                        Total contribution of secure assets (such as government /
                           investment-grade bonds, and/or cash equivalents) comprises 70%
                           (or more) of overall asset composition

                       Relatively high risk („unacceptable‟)

                        Total contribution of relatively high-risk assets (such as stocks,
                           hedge funds, non-investment-grade bonds) comprises more than
                           30% of overall asset composition



 Assessment of recommended product(s):
 - Is the investment capital preserved? Are there any limitations to the capital guarantee?
 - What is the level of risk attributed to the product‟s asset allocation?
      For direct investments: What is the underlying asset class? What is the level of risk
          typically associated with this asset?
      For investment funds: What are the underlying assets which make up this fund?
          What is the relative contribution of the various assets, and how does this
          composition affect the overall investment risk?




                                                                                        Page | 46
Framework for evaluating product suitability – overall assessment




Framework for evaluating product suitability - in terms of liquidity




                                                                       Page | 47
Framework for evaluating product suitability - in terms of investment risk




                                                                             Page | 48
3.4 Analysis of issues underlying unsuitable investment advice




The following section provides hypotheses of possible reasons explaining why advisors might be
recommending unsuitable products.




Each of the above reasons for incorrect advice could be further segmented into potential root cause
reasons as follows (please note that additional hypotheses or verification of the following hypotheses
will be done in conjunction with further findings from the mystery shopping exercise).



Reasons for             Examples of reasons behind                   Areas for assessment during
unsuitable              unsuitable advice                            mystery shopping
investment advice
Wrong
                        - Incorrect analysis by bank/financial       Analysis of product suitability:
classification of
                          institution in terms of risk/return
product                                                              - Based on the product‟s underlying
                          estimates
                                                                       assets, whether the risk profile
                        - Incorrect grouping due to past               described by the advisor is
                          experience with issuing                      reasonably accurate. For example,
                          institution/bank influencing the group       a product described as „low‟ risk
                          to which the product rightfully belongs      may be in fact, a „mid‟ or „high‟ risk
                                                                       product


Wrong                   - Inadequate understanding of the            Analysis of advisory process:
classification of         client‟s financial needs and
                                                                     - Whether the advisor observes the
client                    requirements (e.g. inaccurate
                                                                       relevant obligations as prescribed
                          assessment of the client‟s investment
                                                                       by MiFID, in terms of due diligence
                          objectives, financial situation, or
                                                                       and information transparency
                          investment knowledge)
                                                                     - Whether the advisor was
                        - Advisor did not clearly define or
                                                                       comprehensive and specific in his
                          explain the benchmarks for „low-risk‟,
                                                                       questions to the shopper, as well as
                          „mid-risk‟, or „high-risk‟. As a result,
                                                                       proactive in providing a fair and
                          client may not have accurately
                                                                       balanced view of the required
                          reflected his or her risk preferences
                                                                       information areas
                        - Advisor may have asked leading
                                                                     - Whether the advisor created a

                                                                                                 Page | 49
                    questions about the shopper‟s               conducive environment (in terms of
                    financial knowledge which lead to           personal interaction with the
                    subjective self-assessments with            shopper) to encourage shopper to
                    regard to certain types of investments      be forthcoming with his or her
                                                                questions, or information provision
                  - Advisor could be overly pushy or
                    intimidating, which may discourage         - Whether advisor attempted to
                    the client from being truthful or            assess the shopper‟s understanding
                    forthcoming about his level of               of the information provided, or was
                    investment knowledge or product              willing to clarify on queries posed by
                    understanding                                the shopper


Structural bias   - Advisors may recommend products            Observations from mystery
                    which are not in line with the clients‟    shopping:
                    needs but from which they hope to
                                                               - Mystery shopper to probe advisor
                    gain high commissions, or to achieve
                                                                 as to whether the recommended
                    their sales targets for certain products
                                                                 products are from the advisor‟s firm
                                                                 or from other firms; and whether
                                                                 advisor receives incentives for the
                                                                 recommended products




                                                                                         Page | 50
4. Mystery shopping methodology
4.1 Considerations in the design of the mystery shopping process

Mystery shopping in the financial services industry, with the view of providing an analysis of
investment advice suitability, is an inherently complex process with a number of operational
challenges. The engagement process undertaken with consumers when applying for or discussing
financial products is often detailed in terms of information provided and received, and subject to a
number of subtle stages with defined requirements that must be evaluated.

Optimising data collection during engagement process

During these relatively complex engagements, the span of the shopper‟s ability to recall information
is generally optimised during the first 12 minutes - beyond which, the accuracy of evaluation starts to
diminish as the session duration lengthens.

In order to address this, we felt it would be reflective of a typical customer if the shopper was to take
notes throughout the meeting. Usually, such an approach is avoided in mystery shopping
engagements. However, given the amount of specific information that was likely to be provided, the
requirement for note-taking was deemed to be acceptable in this instance, since an actual customer
would most likely need to record details for their own benefit. Furthermore, this ensured that the
shopper accurately captured the necessary information throughout the engagement process.

The duration for the advisory engagement was estimated to be between 30 minutes to 1 hour on
average. While the difficulty of information recall throughout the discussion process may be
overcome to a certain extent through note-taking, it was not advisable for the visit length to exceed
this timeframe, so as to optimise the quality of information received.


Ensuring a consistent understanding and interpretation of the engagement requirements
amongst shoppers

Given the complexity of financial service offerings and terminology, shoppers may have an
inconsistent understanding and interpretation of the mystery shopping engagement requirements,
despite prior briefing before the assignment. This in turn may lead to errors in terms of the
application of standards and therefore inaccurate post-engagement evaluations by the shoppers.

The following steps were factored into the mystery shopping process to mitigate these challenges:

       During the pre-engagement briefing, shoppers were provided with examples of financial
        products which may be discussed during the advisory process, so that they could have a
        good indication of what to expect.

       Shoppers were also instructed to scan and provide a copy of all the materials which were
        provided to them by the advisor. This subsequently served as an information source for
        post-fieldwork verification and analysis.

For example, within the UK, it is stated within the Financial Services Authority (FSA) handbook that
clients must be given certain information sets with “reasonable notice” during the application
process. The statement of time considered “reasonable notice” is not clearly defined and a review of
the advisor‟s recommendations to existing clients around this point often includes the creation of an
evaluation point which simply asks shoppers “In your opinion and based on your own experience
with the advisor, were you provided with XXX information with reasonable notice prior to reaching
the decision-making point during your interaction?” The interpretation of the statement “reasonable
notice” and the shoppers‟ interpretation of whether they would consider the point at which they were
provided key information during the advisory session as “reasonable notice”, are both inherently
subjective measures that will lead to variable and unreliable data when looked at across a number of

                                                                                                Page | 51
mystery shops. In such cases, the solution would be to ensure shoppers record how much notice
was given, which was then assessed during post-analysis.


Ensuring comparability of results across different shoppers

The relative complexity and therefore variability of the consumer experience represented another
key consideration for this work. Particularly in the case of investment product consultations, the
interaction undertaken between consumer and adviser had a greater tendency to be variable,
depending on the information provided by the consumer, with the conversation direction likely to
change based on this. While it is acknowledged that the process is likely to be broadly comparable
at the overall EU level, it must be recognised that the stages at which certain key information may be
provided will change, depending on the profile and information provided by the mystery customer.

For this reason, the briefing materials were designed to be prescriptive and detailed in terms of
guidelines, so as to ensure shoppers were able to provide a consistent, yet realistic story. It was only
through consistent scenarios that accurate and robust analysis may be undertaken at the end of the
programme.

Throughout the mystery shopping programme, robust training and briefing measures that went
beyond simplistic online training and testing procedures were implemented, ensuring the shoppers
proved their understanding of the requirements before being allowed to undertake their mystery
shop.

In addition, during the post-fieldwork data tabulation, stringent data quality control and validation
measures were put in place to ensure that the mystery shopping outputs were reliable,
understandable and accurate.

It was through these methods that we have been able to optimise data reliability and comparability.


Limiting the incidence of non-investment product recommendations

Given that a number of financial players may also offer non-MiFID investments such as saving
products or insurance plans, the scenarios were designed as such to limit the incidence of these
occurrences. At the same time, the line of questioning as prescribed within the scenarios were also
scripted in a manner to reflect that of an average consumer, who was assumed to be relatively
inexperienced with investment products.

To ensure the advisor steered away from recommending savings or insurance products, the
shoppers were asked to keep the emphasis on their specific interest in investment products.
Instructions to this effect were incorporated into the shoppers‟ briefing notes. This was not to say
however, that a plausible recommendation by the advisor in favour of savings should be opposed to
such a degree as to make the opposition seem artificial and unwarranted:

   “You are seeking to receive a higher reward than you would from a traditional savings account,
    and if the advisor begins steering you down the route of a savings account, remind them that this
    is the case and you wish to talk about investment options.”

   “If you have expressed this desire and the advisor then continues to recommend a savings
    account, please listen to what the advisor says and record the information in the same way.”

   “Likewise, if the advisor begins talking about insurance products, please reiterate that you are
    mainly interested in investment opportunities at this stage. If you have expressed this desire
    and the advisor then continues to recommend Insurance products, please listen to what the
    advisor says and record the information in the same way.”



                                                                                                Page | 52
4.2 Design of mystery shopping scenarios and shopper profiles

The profiles selected for the mystery shopping engagement were meant to represent scenarios of
average consumers at different life stages. Several possible profiles were shortlisted before
deciding on the two most common profiles. Shoppers were categorised into two main profiles – the
“Married Professional” and the “Young Professional”. Both profiles should convey an average
consumer with a relatively low-risk appetite. Other profiles that were considered but not selected
included retired couple, young married couple with no children, and single parent households.


Married Professional
(Between the ages of 30 – 40 OR 40 – 65)

This category of shoppers represented consumers who are currently established in their careers and
are married with families (typically with children). The profile is designed to convey a relatively risk-
averse attitude, as these consumers are deemed to have significant expenditures and financial
commitments (e.g. mortgage and childcare costs).

The age profile was also extended to include individuals from 40 up to 65 years old so as to cover
clients who are pending pre-retirement or have already retired.

In terms of investment objectives, shoppers were briefed to say, “My investment objective is to
increase capital by the end of the investment term in order to have money for my children‟s future –
however, currently I am not entirely sure on the best way of doing this.”

This was to portray a typical customer profile who wants to begin an investment but is unsure exactly
how to do this and precisely what the money will be used for. This assumed that majority of people
are not financial experts and as such, it was important that the study replicates this typical
demographic profile.


Young Professional
(Unmarried; between the ages of 25 – 35)

This category of shoppers comprised consumers who are single with no significant financial
commitments over the next few years. The profile represented individuals with a slightly higher
propensity for investment risk, as they have a longer period of expected earnings (given that they will
be in the early stages of their career), as well as fewer financial burdens to shoulder.

In terms of investment objectives, shoppers were briefed to say “I am looking for a simple investment
which in time will potentially go towards purchasing a property. I also feel that I should be more
disciplined and start to save more for the future.”

Should the advisor recommend property as an investment option, shoppers were required to clarify
that they were not interested to invest their money in property as their jobs may require them to
move in the future. This was deemed to be acceptable as it was probable that a young professional
may not want to be financially tied down at this stage in their life.


       Note: The detailed shopper profiles can be found in the Appendix 7.4, Scenario section




                                                                                                Page | 53
4.3 Methodology for identifying target financial players

The target listing of financial providers for the mystery shopping exercise was identified across the
27 EU countries with the following methodology:

  1. Determine the types of financial providers operating in the market.
     An understanding of the country‟s retail investment landscape was firstly obtained to identify
     the main categories of financial providers (e.g. banks, independent financial advisors, building
     societies, etc), as well as to assess the relative market share of each category.

      In general, banks were found to be the main channel of distribution for retail investment
      products and therefore account for a significant portion of the target list. For countries with a
      more diverse industry structure, financial intermediaries were also included in the target list to
      ensure a more representative mix of providers during the mystery shopping exercise.

      Financial providers which are not governed under the MiFID regulation, such as insurance
      companies, are excluded from the target list.

  2. Establish broad list of players for each category of financial providers.
     Within each category of providers, key players were shortlisted based on various parameters,
     such as market size, reputation within the industry, or market popularity. The assessment of
     this shortlist is based on a combination of quantitative and qualitative factors, depending on
     the extent of information availability for each country.

      For example, the relative share of Assets under Management (AUM) was ranked across
      various banks to determine the top players with the largest market size. This listing was further
      mapped against the bank‟s relative standing, reputation, or perceived popularity, within the
      retail investment space in order to shortlist key players that are relevant to the study scope.

      For larger markets, smaller players were also included in the mystery shopping target list in
      order to measure potential disparities in advisory experiences.

  3. Final shortlist of financial players for mystery shopping
     A target of five to ten players were selected from the initial broad list – this comprised banks
     and relevant financial intermediaries, spread across a mix of large and mid-sized players
     (when applicable).

      Further assessment of the player‟s profile and product offerings was done to ensure that the
      company qualified under MiFID‟s regulation (see point 4 below). For example, banks who work
      through third-party financial intermediaries to provide investment products to retail clients
      would not be governed under MiFID, and were therefore excluded from the shortlist.

  4. Assessment of shortlist players for MiFID qualification
     The following checks were conducted for each shortlist player:

       i. Review of player‟s profile through published materials such as web sites and publications,
          to check for formal statements relating to the firm‟s MiFID status, or clauses pertaining to
          the exemption of certain products from MiFID compliance.

      ii. In the absence of any formal information relating to the firm‟s MiFID obligations, further
          checks were then made through phone calls with the relevant authorities for each firm
          (e.g. customer service). The checks would seek to verify the product offerings of each
          firm, as well as to clarify as to whether the products fall under the scope of MiFID. Any
          clauses that excluded certain products or services from MiFID were also noted.

      iii. Lastly, the product and service offerings of each firm were cross-checked against the
           MiFID regulation to ensure that all shortlist players are MiFID-compliant.


                                                                                                Page | 54
    Notes on information sources:
    The above steps were conducted with information obtained from:

         -   Secondary research sources such as financial databases (e.g. Thompson Financial),
             country-specific press articles (e.g. Financial Times), and industry reports (e.g. J.D
             Power) ; as well as

         -   Primary research with country‟s financial industry experts, such as financial trade
             associations (e.g. Association of Independent Financial Advisors in each country),
             central bank, monetary or regulatory authorities. For most countries, interviews were
             conducted with the relevant experts to validate any initial listing of players obtained
             from secondary research.



4.4 Methodology for allocating mystery shopping locations

Selection of key cities for mystery shopping

The selection of mystery shopping locations within each country will be based on:

         Cities‟ population size, as well as
         Cities‟ relative economic importance (GDP contribution) within the country

Using information obtained from secondary research, the cities were ranked accordingly to the
abovementioned indicators. Cities with the most populous or highest economic impact scoring were
identified as key locations for the mystery shopping exercise. This listing included the capital of each
country, which typically serves as the main centre of commerce.

Please refer to appendix 7.1 for the listing of target cities for mystery shopping.


Allocation of shopper visits for each country

The sample size of mystery shopper visits assigned to each country provides a rough guideline on
the average number of target players (actual allocation to be determined for each country):

         Number of shopper visits                 Number of target financial players
         30-40 visits                             3-5 companies
         50-60 visits                             6-8 companies

Please refer to appendix 7.2 for the listing of financial players targeted for mystery shopping.




                                                                                                Page | 55
4.6 Quality control in mystery shopping fieldwork execution and data analysis
The following measures were put in place to ensure the quality and reliability of mystery shopping
outputs:

   -   All data recorded by the shoppers were uploaded to a single online data entry portal within 7
       hours of visits being undertaken;

   -   Relevant documentation were returned to Synovate as proof of the shopper‟s visits (such as
       the collection of a business card from the advisor);

   -   Pre-programmed validation ensured that the shoppers entered all information in the correct
       format before submitting their field reports;

   -   A multi-step in-house process was conducted by Synovate and Bare International, our
       mystery shopping strategic partner, to carefully evaluate each report for:
          • Location match with the address of the targeted bank branch / firm‟s office;
          • Consistency and accuracy of data;
          • Clarity and completeness of data;

   -   Reports that were found to be unacceptable were rescheduled;

   -   Additional quality control checks on the data and reporting outputs were then conducted by
       the Synovate Project Management Team.




                                                                                            Page | 56
4.7 Limitations in the application of mystery shopping results

    Depth of findings may be limited due to the amount of information provided by the
     advisor

     In order to convey a realistic portrayal, shoppers were required to act and respond within the
     boundaries of an average consumer, who is not a sophisticated investor. Questions that were
     deemed to be too „probing‟ or „technical‟ were avoided during the advisory session, so as to
     ensure that the shopper‟s behaviour was congruent with that of an average consumer.

     A particularly relevant instance would be questions relating to the incentive structures a firm
     might operate. The shopper would not be able to probe on these areas, which might be
     considered sensitive by some advisors, without coming across as being „unnatural‟ or
     „suspicious‟.


    Detailed responses may not be fully captured in close-ended questions

     The evaluation template was mainly focused on capturing observations which could be
     quantified as „objective‟ responses, so as to minimise the subjectivity of responses resulting from
     the shopper‟s personal interpretation. Hence, most questions were designed to record relatively
     measurable observations, where shoppers were required to select their responses via a list of
     pre-defined options.

     The disadvantage of such close-ended questions is that detailed findings may not be fully
     captured within the evaluation template. To mitigate this issue, some open-ended questions
     were included in the evaluation template to capture the richness of the shopper‟s interaction with
     the advisor, as well as to provide a more insightful context to the responses obtained from the
     close-ended questions. For example, shoppers were asked whether the advisor explained how
     their risk profiles were being derived (close-ended question), as well as to detail what the advisor
     had said about their risk profiles (open-ended question).
                              26
     In addition, research shows that shoppers may be subject to significant 'biases' (cognitive or
     otherwise) that impact their interpretation of information provided and their subsequent choices
     or behaviour. This means that the views of shoppers regarding the „quality‟ of advice must be
     interpreted with great care, and in the first instance, be viewed as simply the shoppers‟
     perceptions on the advisory process.


    Subjectivity of shoppers’ open-ended comments

     Shoppers were also asked to include their perceptions and personal evaluation of the advisory
     session (e.g. whether the advisor was comprehensive in their information gathering; or was the
     recommended product deemed to be suitable). While such open-ended comments may help to
     provide additional insights to the assessment analysis, they are highly dependent on the
     shoppers‟ personal judgment, as well as level of financial knowledge or investment experience.

     It should be noted that the shopper may suffer from „information overload‟ during the advisory
     session (even if he or she took notes during the meeting), and may have difficulties recalling
     details of the engagement (e.g. details of advisor‟s explanation about investment product and
     associated risk). The implication of information overload is that the advisor may rely on the use
     „heuristics‟ and may be vulnerable to manipulation by the way the information is presented (e.g.
     the order, framing, or format of information provision) 27.


26
  Consumer Decision-Making in Retail Investment Services: A Behavioural Economics Perspective (November 2010)
27
  Andreas Oehler & Daniel Kohlert, „Financial Advice Giving and Taking - Where are the Market‟s Self-healing Powers and a
Functioning Legal Framework When We Need Them?‟, 9 June 2009

                                                                                                                Page | 57
    Shoppers‟ assessment of their advisors may be swayed by factors that have little bearing on the
    quality of advice (e.g. such as the advisor‟s friendliness or appearance).

    Furthermore, the „quality‟ of open-ended comments may vary across shoppers (in terms of
    comprehensiveness or clarity of written descriptions), and therefore required further filtering or
    verification, before they could be incorporated into the data analysis.


   Limited product information for assessing investment suitability

    The extent of analysis for assessing investment suitability depends on the amount of product
    information supplied by the advisors. The following issues, which were observed during the
    mystery shopping fieldwork, may limit the availability of information for analysis:

        - Not all shoppers received investment recommendations from their advisors;

        - A significant number of shoppers were not provided with materials on the recommended
          investments (be it in the form of a product brochure or information on the firm‟s web site).




                                                                                              Page | 58
5. Results of mystery shopping exercise

The results of the mystery shopping exercise will be divided into four main sections. The first three
sections correspond to the two broad themes of the analysis framework: advisory process (section
5.1) and product suitability (sections 5.2 and 5.3). The last section (5.4) provides an integrated view
of the advisory process and product suitability. Each section will report the findings and conclusions
of the mystery shopping study, according to the following components:

   Section 5.1 – Results on advisory process*: The evaluation will cover aspects such as due
    diligence (whether the advisors gathered all the necessary information specified by MiFID), as
    well as transparency (whether the information provided by the advisor was deemed to be
    comprehensive, clear and unbiased). The evaluation will be split into two streams:

    -   Evaluating against MiFID’s requirements – This is to assess whether the advisor fulfilled
        the baseline requirements indicated under MiFID. For example, whether the advisor even
        asked about the shoppers‟ risk appetite (regardless of the comprehensiveness of his or her
        questioning). However, it should be noted that while the study will endeavour to undertake a
        comprehensive mapping of the relevant MiFID requirements within the mystery shopping
        evaluation analysis, the mapping of obligations will not be exhaustive, due to the limited
        duration of the advisory session, as well as to minimise information overload on the part of
        the shopper.

    -   Evaluating against practical considerations - This assessment will cover aspects which
        may not be explicitly specified by MiFID, but may provide further insights on whether the
        underlying principles of MiFID were being achieved. For example, an advisor may have
        casually asked about the shoppers‟ risk appetite, without using any objective tool or means
        to establish the shoppers‟ risk profiles in a comprehensive manner. In this case, the overall
        evaluation of due diligence in this aspect would be deemed as insufficient (even though the
        baseline MiFID requirement was covered), since it is unlikely that the advisor would have
        gathered adequate information to assess the client‟s risk appetite.

   Sections 5.2 and 5.3 – Suitability of product recommendations: This section will showcase
    the characteristics of the proposed investment products, as well as evaluate the suitability of
    these investments (i.e. in terms of level of investment risk and liquidity).

   Sections 5.4 – Assessment of advisory process for suitable and unsuitable products: This
    section will compare the extent of MiFID compliance between suitable and unsuitable
    investments, so as to identify possible correlations across the various parameters of the advisory
    process and product suitability.

* Note: The assessment of advisory process in section 5.1 covers both MiFID and non-MiFID
products (such as investment-linked insurance plans and savings accounts). The study took into
consideration that since an advisor may be licensed to offer both MiFID and non-MiFID products – in
either case, he or she should still observe the appropriate due diligence and information
transparency so as to ensure consumers ultimately receive relevant advice that is suitable to their
requirements. The fact that the final recommendation may be a non-MiFID product should not
preclude the need for rigor and comprehensiveness in the advisory process.




                                                                                               Page | 59
5.1 Results on advisory process

5.1.1 Due diligence

a) Overall assessment of due diligence

In general, it was observed that advisors at the EU level do not fully adhere to MiFID guidelines in
the area of due diligence – only ~8% of advisors fulfilled all the obligations that were mapped under
this aspect. Areas that seemed to be most overlooked by advisors were the financial knowledge and
investment experience of the shoppers, as well as their financial situation (i.e. current income and
assets, level of financial commitments, etc).

These observations seemed consistent with the findings for both scenario one (married professional)
and scenario 2 (single professional), with scenario two faring only marginally better than scenario
one (9% of advisors fulfilled all MiFID requirements for scenario two, versus 6% for scenario one).

MiFID does not, however, set a 'hard' requirement on gathering such information, given the need to
adapt the collection of information to different situations. Nonetheless, there should be sufficient
information obtained in order to support the recommendation made. Furthermore, given that the
mystery shoppers were not 'known' to the firms they approached, advisors would still need to
undertake a range of steps in order to demonstrate the soundness of their recommendations.

At the country level, the results appeared to be more varied. Overt adherence to the variety of
possible steps in the due diligence process, to the extent that they are necessary so that the
shopper‟s investment requirements could be accurately assessed, seemed more promising in
countries with more developed financial markets, such as the UK (23% of advisors), France (17% of
advisors) and Finland (16% of advisors). In contrast, for countries such as Estonia, Greece, Latvia,
Lithuania and Slovenia – none of the advisors explicitly took steps that could be seen to relate to
each of the MiFID requirements. These countries tend to fare significantly below the EU-level
average across all aspects of due diligence, particularly in assessing the shoppers‟ financial
knowledge, investment experience, and financial situation. For example in Greece, none of the
advisors were observed to have queried about the shoppers‟ financial situation.




b) Assessment of due diligence components: Client’s investment objectives

Evaluating against MIFID requirements

Percentage of advisors who asked about the following areas relating to the client’s investment objectives


       Investment                                                                               N= 1209
                                               84%                               16%
         purpose

                                                                                                Yes
 Desired length of
                                                87%                               13%
   investment                                                                                   No


      Risk profile /
                                              76%                             24%
        appetite


                       0%   10%   20%   30%   40%     50%   60%   70%   80%    90%     100%




                                                                                                            Page | 60
In general, advisors were observed to be relatively proficient in gathering baseline information about
the client‟s investment objectives.

This observation was consistent with the findings for both scenarios (i.e. married professional and
single professional).

At the country level, countries with the lowest adherence to MiFID (in terms of covering aspects
relating to investment objectives) were Cyprus and Latvia, where over 50% of the advisors did not
determine the risk profile of the shoppers.

Evaluating against practical considerations

Interestingly, although the shoppers‟ risk appetite appeared to have been covered by most advisors,
the rigour of questioning seemed to be rather lacking for a significant number of advisors (which was
consistent across both scenarios):

        Almost 50% of advisors (including those who did not recommend any product or whose
         recommended products were not covered under the scope of MiFID) appeared to have
         asked but did not seem to record in writing any information about the shoppers‟ risk appetite.
         However, the results seem to be more indicative of country-level findings, rather than across
         all EU member states. For example, almost half of the EU member states had at least 70%
         of advisors recording information about the shoppers‟ risk appetites (Austria, Belgium,
         Czech Republic, Denmark, Finland, France, Germany, Ireland, Netherlands, UK). In
         contrast, in countries such as Greece, Lithuania, Romania, Slovakia, at least 80% of
         advisors had failed to record any information).

        Almost 80% of advisors did not administer a risk profile assessment with the shoppers (and
         only 17% of advisors used a rating scale to assess shoppers‟ risk profile). This finding
         seemed reflective of most EU Member States, with the exception of a few countries where
         the use of some sort of risk rating scale was more prevalent amongst advisors (e.g. Belgium
         – 40%, Germany – 53%, UK – 53%).

This suggests that advisors may have addressed MiFID‟s requirements on this aspect in a
superficial manner, since most did not seem to be very methodical or comprehensive in the manner
in which they established the shoppers‟ risk profiles. This means the establishment of risk appetite
was very much left to the interpretation of the advisors, thereby increasing the advisors‟ potential
bias as well as the legal risk for the firm when it comes to classifying the clients‟ risk profiles.

Furthermore, it should be noted that the advisors‟ and consumers‟ perceptions of investment risk
may differ substantially. For example, in some studies conducted in Germany and in the UK28, it was
found that advisors perceive consumers to be far less risk-averse than their customers‟ own
assessment, while the actual riskiness of their portfolios may be more aligned with the advisors‟ own
perceptions, rather than that of the customers‟.




28
   Based on survey data from a large German bank (cf. Hackethal et al., 2009). A consumer research study in the UK has
also established similar disparities between consumer‟s and advisor‟s definitions of risk categories (Conquest Research
Limited 2004).



                                                                                                             Page | 61
c) Assessment of due diligence components: Client’s financial knowledge
   and investment experience

Evaluating against MIFID requirements

Percentage of advisors who asked about the following areas relating to the client’s financial knowledge and
investment experience


                                                                                                          N= 1209
            Profession                  46%                                  54%

                                                                                                           Yes

       Education level        20%                                  80%                                     No


      Prior investment
                                                    72%                                  28%
         experience


                         0%   10%    20%      30%    40%    50%    60%     70%     80%    90%    100%


When it came to understanding the shoppers‟ financial knowledge and investment experience, it was
observed that while most advisors had asked about the shoppers‟ prior investment experience, only
a handful covered other MiFID requirements such as education level and profession. Only 17% of
all advisors queried the shoppers on all areas. In particular, education level was the most poorly
covered by advisors for most countries. However, the implication of this observation may be viewed
in the context that the advisor could have already assumed the shopper‟s financial background at
the start of the advisory session (since shoppers were required to introduce themselves as relatively
inexperienced investors), and therefore did not see the need to ask about the shopper‟s education
level or profession (note: shoppers only reveal their „profession‟ and „education level‟ when they
were asked by the advisors). Furthermore, advisors may have inferred the shopper‟s education level
from other „sources‟, such as the shopper‟s profession, manner of speech, etc.

Although a person‟s financial capability is strong related to his or her investment experience, the
general tendency of advisors to overlook the client‟s education level may pose a concern as some
studies29 have indicated a possible linkage between education and financial capability with regard to
choice of investment products (even when other characteristics were taken into account).

Interestingly, advisors seem to be more comprehensive in their questioning when dealing with single
professionals, compared to married professionals. For the single professionals, 20% of advisors
were observed to have covered all the MiFID requirements under financial knowledge and
investment experience, compared to 14% for married professionals. In addition, 25% of „single‟
shoppers were asked about their education level, versus 16% of the 'married' shoppers. One
possible reason could be „age bias‟, where advisors assume older shoppers to be more
knowledgeable or are more experienced in investing, and are therefore less concerned about their
education level or profession.

These observations seem prevalent across most EU Member States, even in developed financial
markets such as UK, where over 80% advisors had asked about investment experience and
profession, but only 30% queried about education level. The Netherlands was observed to be the
most comprehensive amongst the EU Member States, with over 40% of advisors covering all the


29
  According to a survey conducted by Financial Services Authority (FSA), „Levels of Financial Capability in the UK‟ (2006), it
was observed that financial capability increases with participants who had made more purchases or had dealt with more
financial products. In addition, scores for financial capability were also found to increase steadily with households who have
higher general education and are older.

                                                                                                                    Page | 62
MiFID requirements in this area. Countries who had the lowest adherence to MiFID were Lativa and
Slovenia, due to the very low incidence of advisors asking about profession and education level.



d) Assessment of due diligence components: Client’s financial situation

Evaluating against MIFID requirements

Percentage of advisors who asked about the following areas relating to the client’s financial situation

                                                                                                    N= 1209
  Regular transactions
                                 29%                               71%
   and expenditures

                                                                                                     Yes
       Current level of
          financial              31%                                69%                              No
        commitments


 Personal income and
                                           52%                               48%
     other assets


                          0%   10%   20%    30%   40%    50%    60%    70%    80%    90%   100%


Generally, advisors did not seem to gather adequate information about the shoppers‟ financial
situation – especially with regard to the shoppers‟ financial commitments, as well as other regular
transactions or expenditures.

In contrast, information relating to the shoppers‟ personal income and assets were relatively better
covered. These observations hold true for both scenarios. This seemed to suggest that advisors may
be more interested to assess the amount that the shopper is able to invest, rather than to
understand the shoppers‟ ability to finance such investments. Interestingly, this observation seemed
consistent with the finding on the types of questions asked by the advisors to establish the shoppers‟
risk profiles – while over 60% of shoppers were queried on their risk-return preferences, only over
30% were asked about their ability to deal with investment risk.

At the country level, most EU Member States tend to fare poorly in this area – the exception is UK,
which appeared to be most comprehensive in terms of covering all aspects of the shoppers‟ financial
situation (72%). Denmark and Ireland were also relatively thorough in assessing the shoppers‟
financial situation (scoring 54% and 50% respectively).


Evaluating against practical considerations

Advisors were fairly detailed when it came to assessing the shoppers‟ personal income and assets –
of those who discussed about the shoppers‟ personal income and assets, 85% asked about the
shoppers‟ savings / current investments, 75% about the shoppers‟ personal income, and 56% about
property ownership.

Similarly, for advisors who queried about the shoppers‟ financial commitments, most covered areas
such as household / child care cost (65%), mortgage / rent commitments (73%), and debts (68%).




                                                                                                              Page | 63
5.1.2 Transparency - comprehensiveness of financial advice

a) Overall assessment of information transparency
Similar to the observation for due diligence, most advisors appeared to have covered the broad
areas specified under MiFID. However, information provision by the advisors seemed to be rather
superficial and often lacked the necessary details in order for the shopper to make a fully informed
investment decision, particularly for fairly complex areas such as investment risk. Furthermore, most
advisors did not seem to provide adequate information on disclosures relating to conflicts of interests
and inducements.

It should be noted that transparency requirements relate both to the service being offered by a
financial agent (e.g. advice) and to the products or investments being proposed in relation to that
service. In the latter area, there may be additional requirements which apply to the advisor, so as to
ensure effective product or investment transparency. In the case of UCITS (Undertakings for
Collective Investment in Transferable Securities) funds, for instance, the provision of certain
„investor-friendly‟ product information is required by EU law.



b) Assessment of transparency components: Information format

Of all the shoppers who were recommended products, a little over half of them received the
information in a durable format, mostly in the form of a brochure leaflet. In some instances, advisors
used their computers to show the characteristics of the products to the shopper. However, the
shoppers in most cases were not given the website or instructions on how to find product information
on their own, so as to be able to do their own assessment.


c) Assessment of transparency components: Information about the firm

Evaluating against MIFID requirements

Percentage of advisors who provided the following information about the firm


                                                                                          N= 1209

   Name and contact
                                                  91%                             9%
     details of firm
                                                                                          Yes

                                                                                          No

  Firm's authorisation
       to provide                         59%                            41%
   investment advice



                         0%   10%   20%   30%   40%   50%   60%    70%   80%   90% 100%



Instances where advisors had provided both introductory information about the firm and proof of the
firm‟s authorisation to offer investment advice appeared to be fairly limited. UK and Ireland were
notable exceptions, with more than 80% of advisors fulfilling all the requirements in this area.

Majority of shoppers were provided basic introductory and contact information about the investment
firm. This observation appeared to be generally consistent across most EU Member States, with the
exception of Latvia, where less than half of the advisors provided this information to the shoppers.

                                                                                                    Page | 64
Generally, information about the firm‟s authorisation to provide investment advice was
communicated either in a form of a document and / or verbally by 60% of the advisors. Of these,
37% of advisors provided some form of document to indicate this authorisation, while 23% only
conveyed this information verbally. The remaining 40% of advisors did not provide any form of
written or verbal information on this aspect.

Interestingly, in cases where the meeting with the client took place at the bank or at the premise of
the investment company, the advisors were readily perceived to be credible – despite not providing
any verbal or written proof of authorisation. As a result, the percentage of advisors who did not
provide any written or verbal proof may be lower than 40% (since this could be attributed to the
advisory sessions taking place within the banks‟ or firms‟ premises).


d) Assessment of transparency components: Information about the firm’s
   financial instruments

Evaluating against MIFID requirements

Percentage of advisors who provided the following information about the firm’s financial instruments (for specific
investment recommendations)

                                                                                                   N= 1084

      Explanation of
                                                   77%                            23%
    investment details
                                                                                                   Yes

                                                                                                   No

         Explanation of
                            8%                            92%
        investment risks



                           0%    10%   20%   30%   40%   50%   60%   70%    80%    90% 100%


When presented with product recommendations, shoppers were instructed to take note as to
whether the advisors had explained the features of the proposed investments in detail (e.g. type of
investment, product‟s underlying assets or allocation of assets, investment risk, etc). Based on the
verbatim provided by the mystery shoppers, it seemed that close to 80% of advisors had provided
adequate explanations of the investment(s), with some degree of detail, such as level of investment
risk, product‟s past performance, product maturity period (when applicable), capital protection (when
applicable), etc. While the „explanation of investment details‟ appeared to be relatively well-covered,
the interpretation of this finding should be viewed in the following context:

          It should be noted that while MiFID states that the description provided by the advisor should
           „explain the nature of the specific type of instrument concerned‟ (Article 31 of Directive
           2006/73/EC) – this requirement may be rather subjective as MiFID does not further specify
           the elements that constitute „investment nature‟.

          As such, the evaluation of this aspect was based on the shoppers‟ perception as to whether
           the advisor explained the proposed investment in detail during the session, which was
           further validated by the verbatim provided by the shopper (shoppers were asked to explain
           the details which were discussed with them and for which products). In this case, the
           qualification of a „yes‟ or „no‟ was based on the richness and relevance of product details
           described by the shopper.




                                                                                                             Page | 65
In terms of baseline understanding, most shoppers seemed to be clear about the product category of
the proposed investment – the incidence of „incorrect product classifications‟ (e.g. where a bond fund
was mistaken as a bond) appeared to be minimal.

With regard to the description of investment risk, the assessment was based on whether the advisor
fulfilled all the necessary elements specified by MiFID (Article 31 of Directive 2006/73/EC), namely:

       The risks associated with that type of financial instrument, including an explanation of
        leverage and its effects, as well as the risk of losing the entire investment;

       The volatility of the price of such instruments and any limitations on the available market for
        such instruments;

       The fact that an investor might assume, as a result of transactions in such instruments,
        financial commitments and other additional obligations, including contingent liabilities,
        additional to the cost of acquiring the instruments;

       Any margin requirements or similar obligations, applicable to instruments of that type.

While most shoppers were generally informed about investment risks, the advisors‟ description was
often found to be incomplete (shoppers‟ reports indicated that less than 10% of advisors managed to
cover all aspects of risk):

       Of those who received information about risk during the advisory session, most were
        informed about the extent and probability of investment fluctuation (82%), and to a lesser
        extent, the possibility of losing the entire investment capital (53%) where relevant, as well as
        related financial obligations (26%).

       The limited disclosure on the risk of losing entire investment capital may pose a concern,
        since over 80% of investment recommendations do not have capital protection.
        Furthermore, of the investments which provide some form of capital protection, 24% of these
        have maturity periods of more than 5 years, exceeding the desired investment timeframe as
        specified within the scenarios (which means an investor may be exposed to liquidity risk,
        should he choose to cash in his investment during the fifth year).

Apart from fees and upfront charges associated with the investment, there was no mention of other
financial commitments and obligations (e.g. leveraging or margin requirements) by the advisors. It
was also not clear whether all investment costs (e.g. annual fund management charges) were being
effectively communicated.


Evaluating against practical considerations

Shoppers were generally provided with the risk level of the proposed investments (i.e. high, mid, or
low investment risk). However, the explanation of risk level appeared to be rather vague – most
advisors tend to highlight the „low-risk‟ nature of the investment, but did not give further explanation
to qualify the risk level or had provided descriptions that were too general. Furthermore, while the
explanation of risk by the advisor depends to some extent on the feedback he receives from the
consumer, there were instances where the advisor's descriptions of risk could be misleading:

       “The level of risk suits your risk profile” (Advisors who made this statement did not offer any
        further explanation as to how the level of investment risk was suitable for the shopper,
        based on his or her profile);

       “This fund invests in bonds, which is less risky than equity funds” (Such a statement may be
        misleading because certain bonds, such as junk bonds or non-investment grade bonds, may
        still pose substantial risk to the investor); or


                                                                                                Page | 66
        “Investment is low-risk because it is highly diversified” (While diversification may be a
         general strategy for reducing the level of risk exposure, the extent to which risk may be
         potentially mitigated depends on the allocation of investment across types of asset classes,
         industry sectors, geographies, etc. In this case, the advisor made a general remark without
         providing a detailed explanation on the constituents of diversification).

In particular, the association between „low-risk investments‟ and „bond funds‟ may be misleading
since bond funds are often misconceived as having no risk to the principal (in reality, a fund‟s
investment value may fluctuate or even decline. In addition, the interest return for bond funds may
fluctuate with changes to the underlying bond portfolio).

Furthermore, very few advisors explained investment risk in the context of time frame. For example,
while a number of advisors highlighted the availability of capital protection, most do not mention the
duration of required investments or penalties for early investment withdrawal.



e) Assessment of transparency components: Information about the firm’s
   charges

Evaluating against MIFID requirements

Percentage of advisors who provided information on the firm’s investment charges

                                                                                                N= 1209



                                                                                                 Yes
    Information about
                                                74%                             26%              No
    the firm's charges




                         0%   10%   20%   30%    40%   50%   60%   70%    80%      90%   100%


According to MiFID (Article 31 of Directive 2006/73/EC), investment firms are required to provide
their retail clients and potential retail clients with information on relevant costs and associated
charges, such as the total price to be paid by the client in connection with the financial instrument or
the investment service or ancillary service, including all related fees, commissions, charges and
expenses, and all taxes payable via the investment firm; or if an exact price cannot be indicated, the
basis for the calculation of the total price so that the client can verify it.

As the definition of „relevant‟ investment charges is likely to vary widely with different investment
firms or financial products, shoppers were simply asked to note broad mentions of product /
transaction charges, as well as expenses relating to the advisor‟s remuneration (the detailed
breakdown of investment expenses was not required, so as to avoid information overload on the part
of the shopper). It should be noted that the qualification of MiFID compliance on this aspect is
defined in a broad sense (i.e. in the context of the mystery shopping exercise, an advisor is deemed
to have met MiFID requirements if he or she provided some information on investment fees /
charges) – since there is no means of determining whether all the „relevant‟ fees have been
accounted for (without further details on the actual incentives that might be in place for a particular
sales channel).




                                                                                                          Page | 67
Over 70% of advisors provided some information on certain fees and charges related to making the
investment. Most shoppers were provided with information related to upfront product charges (70%).
Information on advisors‟ remuneration was not frequently discussed (30%).

While it is possible that the lack of disclosure on remuneration may be due to the fee structure of the
investment firm (e.g. fees based on the dispensing of advice, rather than by transaction), this may be
more of an exception rather than the norm, since it is a rather common practice in the retail
investment industry to not charge customers directly for advice, but for customers to pay indirectly
through distribution fees, commissions, and other inducements, etc. As such, the limited instances of
disclosure relating to remuneration fees may be symptomatic of partial information transparency.


f)     Assessment of transparency components: Disclosures on inducements
       and conflicts of interest

There was also very limited information provided to shoppers regarding potential conflicts of interest.
Less than 5% of advisors talked about aspects such as conflicts of interest and inducements.
However, the implications of these findings should be viewed in context, as they do not necessarily
indicate that 95% of behaviours were non-compliant:

      Inducements from third parties are allowed only insofar they are designed to enhance the
       service provided to clients and are disclosed to them. However, not all investment firms may
       receive inducements, and as such, the lack of disclosure need not necessarily indicate the
       violation of MiFID regulation. On the other hand, the reception of inducements may be
       common for certain products or markets – consequently, a common lack of disclosure might be
       indicative of potential violation of the relevant rules;
      Regarding conflicts of interest, investment firms have to establish and adopt procedures and
       policies to effectively manage conflicts of interest. While a general description of the conflict
       policy has to be provided to clients, a more specific disclosure is only needed when
       organisational or administrative arrangements made by the investment firm to manage conflicts
       are not sufficient to ensure that risks of damage to client interests will be prevented. As such,
       the lack of disclosure concerning specific situations of conflicts of interest by firm may mean
       that they are satisfied with the effectiveness of the measures adopted to manage conflicts (and
       they take responsibility for this assessment).

Indeed, MiFID avoids overreliance on disclosure and investment firms are normally required to
comply with other, more substantial requirements in fulfilling their obligation to act honestly, fairly
and professionally in accordance with the best interest of their clients.

While shoppers were required to pose general questions to the advisor regarding possible
inducements (“Do you receive any incentive for the recommended products?”), the topic was
generally awkward to approach for most shoppers and consequently, the information obtained from
this discussion was rather limited. Furthermore, in most instances, advisors also seemed reluctant to
discuss about their commission relating to the investment transaction.

In view of the considerations as mentioned above, the study is only able to draw partial conclusions
on the firm‟s adherence to MiFID‟s guidelines on inducements or conflicts of interest. This is
because an accurate assessment will require a more in-depth knowledge of the firm‟s internal
arrangements and policies, as well as its relations with other firms with regard to the proposed
investment products (however, this requires a highly technical assessment, which cannot be
accomplished through the mystery shopping process).

However, given that only a handful of advisors had touched on inducements and conflicts of interest,
the study could infer that it is likely that a number of firms may have failed to comply with MiFID



                                                                                                Page | 68
guidelines in these aspects, since it seems highly improbable that almost all firms do not receive
inducements from third parties, or have sufficiently managed all conflicts of interest.


g) Assessment of transparency components: Other observations (mystery
shoppers’ feedback)

While the advisors were not observed to be entirely comprehensive, majority were deemed by the
shoppers to be fairly proactive. For example, 80% of shoppers felt that their advisors had checked
on their understanding of the information provided during the engagement session.

Generally, advisors were also perceived to be fairly transparent. About 70% of shoppers felt that
their advisors had volunteered information during the engagement session - however, this was
observed to a lesser extent in countries such as Greece, Portugal, Slovenia and Cyprus.




                                                                                          Page | 69
5.1.3 Transparency - Clarity of financial advice

a) Overall assessment of information transparency
While section 5.1.2 covers the comprehensiveness of information provided by the advisor, the
following section assesses transparency in terms of the extent to which the information provision
was deemed to be fair, clear and easy to understand; and where product comparisons or
performance benchmarks were provided, whether the information was substantiated with relevant
caveats or assumptions to ensure that such indicators were not misleading.

Generally, majority of shoppers felt that the information communicated by the advisors was clear and
presented in a way that was easy to understand. Most shoppers also felt that the information given
by the advisors was conveyed in a fair and unbiased manner.

The majority of advisors (60-70%) would substantiate performance benchmarks (be it on past or
forecast performance) with the necessary assumptions or caveats as required under MiFID.


b) Assessment of transparency components: General information provision
Almost 90% of shoppers felt the information provided by the advisors was clear and easy to
understand. However, this evaluation should be considered with some degree of subjectivity, since it
is possible that the advisor may have over-simplified the product complexities or underplayed the
product‟s investment risk.

Furthermore, the existence of information asymmetry between the advisor and the average investor
means that consumers may face a high risk of receiving unreliable or incorrect advice even without
recognising it. Conversely, clients who are more knowledgeable will be better placed to evaluate the
quality of investment advice, and will be able to identify incomplete information or inaccuracies in the
advisors‟ communication.


c) Assessment of transparency components: Information about the past
   performance of the financial product

Evaluating against MIFID requirements

Percentage of advisors who clarified that past performance may not be a reliable indicator of future results (based
on those who provided information on the past performance of the proposed investment product)


                                                                                       N= 651
 Information on past
                                               94%                            6%
     performance
                                                                                      Clarification provided
                                                                                      No clarification provided
                       0%   10% 20% 30% 40% 50% 60% 70% 80% 90% 100%




                                                                                                               Page | 70
d) Assessment of transparency components: Information about the future
   performance of the financial product

Evaluating against MIFID requirements

Percentage of advisors who clarified that forecasts may not be a reliable indicator of future performance (based on
those who provided projections on the future performance of the proposed investment product)


                                                                                          N= 526
       Information on
                                         68%                           32%
          forecasts
                                                                                         Clarification provided
                                                                                         No clarification provided
                        0%   10% 20% 30% 40% 50% 60% 70% 80% 90% 100%




                                                                                                            Page | 71
5.2 Overview on investment recommendations

Overall, there were 1,084 recommendations made by the advisors. Of these:

        Almost 67% or 725 investment recommendations were for products that are covered under
         the scope of MiFID;

        The remaining 33% or 359 shoppers received recommendations for products that are not
         covered under MiFID, such as investment-linked insurance plans and savings accounts.



5.2.1 Distribution of recommended investments

By broad product categories

Based on mystery shopping data analysis
Total number of recommended products across EU = 1,084


                                                      Structured products,
                                                              5%

                                                                Alternative
                                                             investments, 3%

                Investment funds,
                      50%

                                          Savings accounts
                                          (Non-MiFID), 14%




                                    Insurance plans (Non-
                                         MiFID), 19%

   Stocks, 1%

          Bonds, 8%




Investment funds were the most frequently recommended products across the EU, accounting for
50% of total proposed products. A further split of types of investment funds is illustrated below. It is
to be noted that investment-linked insurance plans and savings accounts, which fall outside the
scope of MiFID, were also recommended to the shoppers.




                                                                                                Page | 72
By types of investment funds

Based on mystery shopping data analysis
Total number of recommended investment funds across EU = 545




                           Bond funds,                    Note: Mixed funds are funds which hold different
                              28%                           asset classes within their investment portfolio
     Mixed funds,                                        (versus bond funds, which comprise mainly bonds;
         52%                                               or equity funds, which comprise mainly stocks)



                           Equity funds,
                              21%




5.2.2 Characteristics of recommended investments

The following section examines the profiles and characteristics of investments which were
recommended by the advisors - specifically, the assessment of investment risk and liquidity.

For the purpose of this study, the indicators of „investment risk‟ will be based on the product‟s
underlying asset class (i.e. whether the asset may be considered as inherently „safe‟ or „risky‟) or
asset composition (i.e. the contribution of „safe‟ assets in the product‟s investment portfolio); as well
as the availability of capital protection. The „effectiveness‟ of capital protection is assessed vis-à-vis
any conditions which may limit the extent of risk insurance offered by the investment. For example, a
consumer may be exposed to liquidity risk if the investment‟s capital protection is conditional upon
product maturity, and the maturity period is longer than the person‟s desired investment timeframe.

Product liquidity is defined by whether the financial product‟s maturity date, where such exists, is
aligned with the person‟s desired length of investment (which has been defined as 5 years for the
mystery shopping scenarios). For products which have maturity periods beyond that of the
investor‟s desired timeframe, but do not impose any penalties for early withdrawal, the study
considers such investments to be relatively liquid but also recognizes that the investor may be
exposed to liquidity risks (as mentioned above).




                                                                                                              Page | 73
a) Recommendations on investment funds

Asset composition

Based on mystery shopping data analysis
Percentage of recommended investments which comprise the following asset composition


                                                                                                             N= 545
    Investment funds
                              24%                  30%               15%              30%
         (Mixed)
                                                                                                          Percentage of product
         N= 282
                                                                                                          composition / portfolio
                        2%                                                                                invested in „safe assets‟
    Investment funds
                                                              98%
        (Equity)                                                                                           70% of more
         N= 112                                                                                            69% - 50%
                                                                                        1%
                                                                                                           49% to 30%
    Investment funds
                                                   79%                             4%        15%           Less than 30%
         (Bond)
         N= 151

                       0%    10%    20%     30%      40%   50%      60%    70%    80%    90%       100%


Note: „Safe assets‟ are defined as government / investment-grade bonds, and/or cash equivalents. A high percentage of „safe
assets‟ corresponds to low investment risk (and vice versa).



Availability of capital protection

Based on mystery shopping data analysis
Percentage of recommended investments which provide capital protection


                                                                                              3%             N= 545
   Investment funds
                                                        90%                                    7%
        (Mixed)
                                                                                                            No capital protection
       N= 282


   Investment funds
                                                  75%                            8%          17%            Capital protection avaliable
       (Equity)
                                                                                                            (product maturity of more
       N= 112                                                                                               than 5 years)

                                                                                                            Capital protection avaliable
   Investment funds                                                                                         (product maturity of 5
                                               69%                          6%          25%
        (Bond)                                                                                              years or less / no product
       N= 151                                                                                               maturity)

                       0%    10%    20%    30%     40%     50%      60%    70%   80%     90%       100%




                                                                                                                  Page | 74
Investment liquidity

Based on mystery shopping data analysis
Percentage of recommended investments which fall into the following categories


                                                                                              3%      N= 545
    Investment funds
                                                       90%                               7%
         (Mixed)
        N= 282                                                                                       Product does not have a
                                                                                                     maturity period
    Investment funds
                                               70%                               20%     10%
        (Equity)                                                                                     Product has a maturity period,
        N= 112                                                                                       which is 5 years or less


    Investment funds                                                                                 Product has a maturity period,
                                        50%                               40%            10%         which is more than 5 years
         (Bond)
        N= 151

                       0%   10%     20%     30%    40%     50%    60%     70%    80%   90%    100%




Summary of investment funds

a) Characteristics of investment funds (mixed funds)
    -    In countries such as Bulgaria, Netherlands and the United Kingdom, mixed funds accounted
         for close to 50% of total product recommendations.
    -    A significant number of „mixed‟ funds were deemed to be high risk - over 30% had portfolios
         comprising 70% (or more) of risky assets (such as stocks, non-investment grade bonds,
         etc).

b) Characteristics of investment funds (bond funds)
    -    The geographical focus for most bond fund portfolios is usually within the EU region - only a
         minority invest in bonds outside of the EU region or in emerging markets.
    -    Majority of funds comprise „safe‟ assets such as government-issued bonds or investment-
         grade bonds (according to the evaluation of international credit agencies such as Moody‟s or
         Morningstar). 19% of funds also have some form of capital protection – however, 45% of
         these funds have a penalty for early withdrawal.

c) Characteristics of investment funds (equity funds)
    -    Czech Republic and Ireland have the highest number of equity fund recommendations,
         (38% and 35% respectively), compared to other EU Member States. ).
    -    Most equity funds are evenly invested in the EU region, as well as within emerging markets.
    -    Of the total equity funds recommended, about 40% were deemed as „low risk‟. The
         remaining equity funds may be viewed as „high risk‟, since stocks are inherently assumed to
         be a riskier asset class (the study does not make distinctions between varying degrees of
         risk which may be attributable to the types of stocks within the fund, for example, large
         capitalisation versus small capitalisation stocks, etc).
    -    Interestingly, most equity funds do indicate on their prospectus or product brochures that the
         funds are of relatively higher risk – however, this information is often indicated in small print,
         which may be easily missed by an average investor.



                                                                                                           Page | 75
b) Recommendations on bonds

Underlying asset class

Based on mystery shopping data analysis
Percentage of recommended bonds which fall into the following categories


                                                                                                    N= 85



           Bonds                             76%                                 24%             Government /
                                                                                                 investment-grade bonds

                                                                                                 Non-investment grade
                                                                                                 bonds

                   0%    10%    20%    30%    40%    50%    60%    70%     80%   90% 100%


Note: „Safe assets‟ comprise government and/or investment-grade bonds. A high percentage of „safe assets‟ corresponds to
low investment risk (and vice versa).



Availability of capital protection

Based on mystery shopping data analysis
Percentage of recommended bonds which provide capital protection

                                                                                                   N= 85


                                                                                  4% 4%          No capital protection


           Bonds                                   93%
                                                                                                 Capital protection avaliable
                                                                                                 (product maturity of more
                                                                                                 than 5 years)
                                                                                                 Capital protection avaliable
                                                                                                 (product maturity of 5 years
                                                                                                 or less / no product
                                                                                                 maturity)
                   0%   10%    20%    30%    40%    50%     60%    70%     80%   90% 100%




                                                                                                               Page | 76
Investment liquidity

Based on mystery shopping data analysis
Percentage of recommended bonds which fall into the following categories



                                                                                                        N= 85



                                                                                                      Product does not have a
                                                                                                      maturity period
           Bonds                    50%                          29%               21%
                                                                                                      Product has a maturity
                                                                                                      period, which is 5 years or
                                                                                                      less
                                                                                                      Product has a maturity
                                                                                                      period, which is more than 5
                                                                                                      years
                    0%   10%    20%     30%    40%    50%     60%    70%     80%     90% 100%




Summary of bonds
   The geographical focus for most bonds is usually within the EU region - only a minority invest in
    bonds outside of the EU region or in emerging markets.
   Of the total recommended bonds, majority were deemed as „low risk‟ (about 76% of
    recommendations were government-issued bonds or investment-grade bonds).



c) Recommendations on structured products

Asset composition

Based on mystery shopping data analysis
Percentage of recommended structured products which fall into the following categories


                                                                                                         N= 56



                                                                                                      Percentage of product
                                                                                                      composition / portfolio
       Structured
                          23%                                   77%                                   invested in „safe assets‟
        products
                                                                                                         70% of more
                                                                                                         69% - 50%
                                                                                                         49% to 30%
                                                                                                         Less than 30%

                    0%   10%     20%    30%     40%     50%    60%     70%     80%       90%   100%



Note: „Safe assets‟ comprise government / investment-grade bonds, and/or cash equivalents. A high percentage of „safe
assets‟ corresponds to low investment risk (and vice versa).




                                                                                                                    Page | 77
Availability of capital protection

Based on mystery shopping data analysis
Percentage of recommended structured products which provide capital protection

                                                                                                          N= 56


                                                                                                      No capital protection

       Structured
                                36%              11%                     53%
        products
                                                                                                      Capital protection avaliable
                                                                                                      (product maturity of more
                                                                                                      than 5 years)
                                                                                                      Capital protection avaliable
                                                                                                      (product maturity of 5 years
                                                                                                      or less / no product maturity)
                    0%   10%     20%    30%     40%    50%     60%    70%      80%     90%    100%




Investment liquidity

Based on mystery shopping data analysis
Percentage of recommended structured products which fall into the following categories


                                                                                                             N= 56


                                                                                                           Product does not have a
                                                                                                           maturity period
      Structured
                          25%                                60%                             15%
       products
                                                                                                           Product has a maturity
                                                                                                           period, which is 5 years
                                                                                                           or less
                                                                                                           Product has a maturity
                                                                                                           period, which is more
                                                                                                           than 5 years
                   0%    10%    20%     30%     40%     50%     60%     70%      80%     90%       100%




Summary of structured products
   Most of these structured products were “trackers” of major indices.
   Majority of structured products were deemed as „high risk‟ – about 77% had portfolios
    comprising 70% (or more) of risky assets (such as stocks, non-investment grade bonds, etc).


d) Recommendations on stocks and alternative investments
   For the purpose of this study, stocks (N=8) and alternative investments (N=31) are considered
    by default to be inherently risky products
   Most alternative investments were commodity futures or real estate (through funds or direct
    investment).




                                                                                                                     Page | 78
5.2.3 Characteristics of recommended investments – by countries

a) Assessment of product investment risk

i) Assessment of underlying asset class / asset composition


Based on mystery shopping data analysis (exclude non-MiFID products)
Percentage of recommended investments (across each Member State) which comprise the following asset composition

    EU Average                                                                                        N= 725
        Romania
             Italy
                                                                                                   Percentage of product
            Malta                                                                                  composition / portfolio
    Luxembourg                                                                                     invested in „safe assets‟
          Austria
           Latvia                                                                                   70% of more
               UK                                                                                   69% - 50%
        Portugal                                                                                    49% to 30%
       Germany                                                                                      Less than 30%
     Netherlands
          Cyprus
         Belgium
  Czech Republic
       Denmark
            Spain
        Bulgaria
         Estonia
         Sweden
          Finland
          Poland
        Slovenia
        Hungary
       Lithuania
          France
        Slovakia
          Greece
          Ireland

                     0%   10%   20%    30%    40%     50%    60%     70%    80%    90%    100%




                                                                                                             Page | 79
ii. Assessment of capital protection

Based on mystery shopping data analysis (exclude non-MiFID products)
Percentage of recommended investments (within each Member State) which fall into the following categories

     EU Average                                                                                               N= 725
         Slovenia
         Slovakia
      Netherlands
                                                                                                            No capital protection
             Malta
           Greece
        Denmark
           Cyprus                                                                                           Capital protection
         Bulgaria                                                                                           avaliable (product maturity
                                                                                                            of more than 5 years)
              Italy
          Sweden
           Finland                                                                                          Capital protection
                                                                                                            avaliable (product maturity
           France                                                                                           of 5 years or less)
                UK
           Austria
           Poland
        Germany
         Portugal
            Latvia
             Spain
          Belgium
          Estonia
           Ireland
         Romania
        Lithuania
     Luxembourg
         Hungary
   Czech Republic

                      0%   10%    20%     30%     40%     50%     60%    70%     80%     90%    100%


Most proposed investment products do not have capital protection - only 20% of product
recommendations have capital protection (however, it is not necessary to have such protection in
order to qualify a recommendation as being suitable). It should also be noted that for a number of
products with capital protection, the guarantee is only valid if the product is held to full maturity.




                                                                                                                  Page | 80
iii. Assessment of overall investment risk

Based on mystery shopping data analysis (excluding non-MiFID products)

Product is deemed to be of relatively low risk it fulfils any of the following:


 - Capital protection is provided (product has no maturity period / maturity is 5 years or less); and / or
 - Underlying asset class / asset composition is deemed as low-risk:
    o   Asset class: „Secure assets‟ are defined as government / investment-grade bonds, and/or cash equivalents; whereas
        „high-risk assets‟ are defined as stocks and non-investment-grade bonds
    o   Asset composition: An investment is deemed to be relatively „safe‟ if the total contribution of secure assets comprises
        70% (or more) of its overall asset composition, or relatively „risky‟ if the total contribution of high-risk assets comprises
        more than 30% of its overall asset composition



             EU Average                                                                                                     N=725
                Romania
                     Italy                                                                                                 Low risk
            Luxembourg
                    Malta                                                                                                  High risk

                Hungary
         Czech Republic
                   Latvia
                  Austria
                Lithuania
                 Portugal
                      UK
                 Belgium
                   Spain
                Germany
             Netherlands
                  Estonia
                  Cyprus
                 Sweden
                Denmark
                 Bulgaria
                  Poland
                  Ireland
                  Finland
                Slovenia
                  France
                Slovakia
                  Greece

                             0%    10%      20%     30%      40%      50%         60%   70%   80%      90%     100%



Generally, only 45% of recommended products are deemed to be of „low risk‟ in terms of meeting
the criteria as mentioned above.
However, the assessment of risk appears to be rather varied across countries – with some countries
having a significant pool of „low-risk‟ products (e.g. Romania, Italy, Luxembourg, etc), as well as
countries with an overwhelming high percentage of „high-risk‟ products (e.g. Greece, Slovakia, etc).



                                                                                                                          Page | 81
b) Assessment of product investment liquidity

i. Assessment of product maturity periods

Based on mystery shopping data analysis (exclude non-MiFID products)
Percentage of recommended investments (within each Member State) which fall into the following categories


       EU Average                                                                                            N=725
          Slovenia
       Netherlands
          Bulgaria                                                                                          Product does not have a
                                                                                                            maturity period
           Sweden
          Denmark
            Poland                                                                                          Product has a maturity
                                                                                                            period, which is 5 years or
           Greece                                                                                           less
         Germany
                                                                                                            Product has a maturity
            France                                                                                          period, which is more than 5
           Finland                                                                                          years
             Spain
          Slovakia
          Romania
             Latvia
            Cyprus
            Austria
          Portugal
           Estonia
               UK
             Malta
          Belgium
          Lithuania
      Luxembourg
   Czech Republic
              Italy
          Hungary
            Ireland

                      0%   10%    20%     30%     40%     50%     60%     70%    80%     90%     100%


At the EU level, about 90% of products recommended have no maturity period or a maturity period
of 5 years or less. The exception is Ireland, where more than half of the recommended products
have maturity periods longer than 5 years.




                                                                                                                 Page | 82
ii. Assessment of penalties for early investment withdrawal before product maturity (only
applicable to products with maturity periods)

Based on mystery shopping data analysis (exclude non-MiFID products)
Percentage of recommended investments (within each Member State) which fall into the following categories

      EU Average                                                                                             N=222
           Ireland
           Poland
           Finland                                                                                          Penalty for early
   Czech Republic                                                                                           withdrawal
                UK                                                                                          No penalties for early
           France                                                                                           investment withdrawl
         Hungary
         Portugal
           Austria
              Italy
          Sweden
             Spain
         Slovenia
         Slovakia
         Romania
      Netherlands
             Malta
     Luxembourg
        Lithuania
            Latvia
           Greece
        Germany
          Estonia
        Denmark
           Cyprus
         Bulgaria
          Belgium

                      0%   10%    20%     30%     40%     50%    60%     70%     80%     90%    100%


Only a minority of products (that have maturity periods) have a penalty for early withdrawal.
However, it should be noted that these penalties are often not explicitly mentioned by the advisor.
Furthermore, most published materials only mention such information in small print.

Interestingly, for Ireland, the majority of the investments with maturity periods also impose penalties
for early withdrawal.




                                                                                                                 Page | 83
iii. Assessment of overall investment liquidity
Product is deemed to be relatively liquid if it fulfils any of the following:
-      Does not have a maturity period
-      Has a maturity period of 5 years or less
-      Does not impose any penalties for early investment withdrawal

Conversely, a product is deemed to be relatively illiquid if it has a maturity period that is more than 5 years
and imposes penalties for early investment withdrawal

Based on mystery shopping data analysis (exclude non-MiFID products)
Percentage of recommended investments (within each Member State) which fall into the following categories

       EU Average
                                                                                                                    N=725
           Sweden
              Spain
                                                                                                                  Product is relatively liquid
          Slovenia
          Slovakia
                                                                                                                  Product is relatively illiquid
          Romania
            Poland
       Netherlands
              Malta
      Luxembourg
         Lithuania
             Latvia
            Greece
         Germany
           Estonia
         Denmark
            Cyprus
          Bulgaria
           Belgium
          Portugal
    Czech Republic
            Austria
               Italy
            France
            Finland
          Hungary
                 UK
            Ireland

                       0%   10%     20%      30%      40%      50%      60%     70%   80%     90%     100%


Generally, most proposed investments are relatively liquid across EU Member States – with the
exception of Ireland.




                                                                                                                         Page | 84
5.3. Assessment of suitability

5.3.1 Overview of investment suitability

About 43% of products can be deemed to be broadly „suitable‟ under a relatively simple rubric (i.e.
basically fulfils shoppers‟ needs in terms of investment liquidity and risk level) – while the remaining
57% were assessed as broadly „unsuitable‟ under a relatively simple rubric (i.e. did not fulfil
shoppers‟ needs in terms of investment liquidity and risk level).
The main driver of „unsuitability‟ was the relatively high level of investment risk of the proposed
products (which accounted for over 80% of „unsuitable‟ cases):
-    Most products are deemed to be relatively liquid in terms of fulfilling the shoppers‟ desired
     investment duration – about 90% of recommended products have either no maturity period or a
     maturity period of 5 years or less30.
-    Despite the fact that the shopping scenarios were designed to focus on lower risk products, a
     significant number of recommendations were products that were deemed to be risky31:
     o    About 80% of risky products were investment funds, specifically equity funds and „mixed‟
          funds32. A significant number of „mixed‟ funds were deemed to be „high-risk‟ - over 30% had
          portfolios comprising 70% (or more) of risky assets (such as stocks, non-investment grade
          bonds, etc).
     o    Only 20% of investment recommendations provided capital protection. Even then, it was
          noted that 24% of such products have maturity periods which were longer than the
          shoppers‟ desired time frame of 5 years – this means the consumer may still stand to lose
          their capital should they withdraw their investment before the fund‟s maturity period.




30
   For the purpose of this study, product liquidity is defined by whether the financial product‟s maturity date, where such exists,
is aligned with the person‟s desired length of investment (which has been defined as 5 years for the mystery shopping
scenarios). For products which have maturity periods beyond that of the investor‟s desired timeframe, but do not impose any
penalties for early withdrawal, the study considers such investments to be relatively liquid but also recognizes that the
investor may be exposed to liquidity risks (for example, the investor may not be able to recoup his capital if there are any
fluctuations to his investment before the product maturity period).

31
   Risk exposure refers to the potential volatility of investment value and may be measured by whether the investment capital
is protected or whether the investment returns are guaranteed (and to what extent), as well as whether the underlying assets
which make up the investment, are inherently risky. For the purpose of this study, „secure assets‟ are defined as government
/ investment-grade bonds, and/or cash equivalents; whereas „high-risk assets‟ are defined as stocks and non-investment-
grade bonds. For funds, an investment is deemed to be relatively „safe‟ if the total contribution of secure assets comprises
70% (or more) of its overall asset composition, or relatively „risky‟ if the total contribution of high-risk assets comprises more
than 30% of its overall asset composition.

32
  Mixed funds are funds which hold different asset classes within their investment portfolio (versus bond funds, which
comprise mainly bonds; or equity funds, which usually comprise mainly stocks).

                                                                                                                        Page | 85
5.3.2 Assessment of investment suitability by countries

a) Types of investment recommendations

Based on mystery shopping data analysis
Percentage of recommended investments which fall into the following categories


         EU Average                                                                                  N=1084
              Austria
             Belgium
                                                                                                    Suitable investments
             Bulgaria                                                                               (MiFID products)
              Cyprus
      Czech Republic                                                                                Unsuitable investments
            Denmark                                                                                 (MiFID products)

              Estonia
              Finland                                                                               Savings accounts (non-
                                                                                                    MiFID products)
              France
            Germany
                                                                                                    Investment-linked
              Greece                                                                                insurance plans (non-
             Hungary                                                                                MiFID products)
               Ireland
                 Italy
               Latvia
            Lithuania
         Luxembourg
                Malta
         Netherlands
              Poland
             Portugal
            Romania
             Slovakia
             Slovenia
                Spain
             Sweden
                  UK

                         0%   10%    20%    30%     40%     50%    60%     70%   80%   90%   100%


The occurrence of unsuitable investment recommendations appears to be varied across EU Member
States. It was generally observed that countries with especially high incidence of „unsuitable
products‟ tend to be the ones with more developed financial industries. Examples: Denmark (68%),
Finland (56%), Netherlands (52%), Sweden (58%), UK (55%).
In contrast, there were also countries which tend to recommend „safe‟ investments such as savings
accounts (despite the fact that the shopper scenarios were designed to steer advisors towards
MiFID investments). This was especially evident in countries such as Cyprus, Greece and Spain,
where the contribution of savings accounts over total recommendations were 54%, 37% and 44%
respectively.




                                                                                                         Page | 86
b) Drivers of investment unsuitability

Based on mystery shopping data analysis (exclude non-MiFID products)
Percentage of unsuitable investments which may be attributed to the following factors

          EU Average                                                                                         N=417
                Austria
              Belgium
              Bulgaria                                                                                     Unsuitability due to high
                                                                                                           investment risk only
               Cyprus
       Czech Republic
             Denmark
                                                                                                           Unsuitability due to poor
               Estonia                                                                                     investment liquidity only
               Finland
                France
             Germany                                                                                       Unsuitability due to high
               Greece                                                                                      investment risk and poor
                                                                                                           liquidity
              Hungary
                Ireland
                  Italy
                 Latvia
             Lithuania
          Luxembourg
                 Malta
          Netherlands
                Poland
              Portugal
              Romania
              Slovakia
              Slovenia
                 Spain
              Sweden
                   UK

                          0%   10%     20%     30%     40%     50%     60%     70%      80%   90%   100%




                                                                                                            Page | 87
5.3.3 Assessment of investment suitability by scenarios

a) Types of investment recommendations

Based on mystery shopping data analysis
Percentage of recommended investments which fall into the following categories


                                                                                             N=1084

         Single
      professional             28%                   41%            12%        19%          Suitable investments
        scenario                                                                            (MiFID products)

        N=527
                                                                                            Unsuitable investments
                                                                                            (MiFID products)

                                                                                            Savings accounts
        Married
                                                                                            (non-MiFID products)
      professional             29%                   36%           17%         18%
        scenario
                                                                                            Investment-linked
        N=557                                                                               insurance plans (non-
                                                                                            MiFID products)
                     0%       10% 20% 30% 40% 50% 60% 70% 80% 90% 100%



Generally, there is no significant difference in the occurrence of suitable / unsuitable investment
recommendations between the two mystery shopping scenarios (i.e. married professional and single
professional). Shoppers in both scenarios received similar recommendations in terms of level of
investment risk and product liquidity.



b) Drivers of investment unsuitability

Based on mystery shopping data analysis (exclude non-MiFID products)
Percentage of unsuitable investments which may be attributed to the following factors



                                                                                                N=417
                         9%
        Single
     professional             7%                                                              Unsuitability due to high
       scenario                                                                               investment risk and
                                                                        84%                   poor liquidity
        N=203
                                                                                              Unsuitability due to poor
                                                                                              investment liquidity only
                         7%
       Married
     professional         4%
                                                                                              Unsuitability due to high
       scenario
                                                                           89%                investment risk only
        N=214


                    0%    10%      20%   30%   40%    50%   60%   70%    80%     90% 100%




                                                                                                                   Page | 88
5.3.4 Assessment of investment suitability by financial players

a) Types of investment recommendations

Based on mystery shopping data analysis
Percentage of recommended investments which fall into the following categories


                                                                                         N=1084


        Banks
          Banks           30%                37%             15%      18%           Suitable investments (MiFID
        Based on mystery shopping data analysis (excluding non-MiFID products such as investment-linked
                                                                                    products)
           N=x
          N=1014
        insurance plans and saving accounts)

                                                                                        Unsuitable investments
                                                                                        (MiFID products)
        Financial advisors
         Based on
      Independent mystery shopping data analysis (excluding non-MiFID products such as investment-linked
                                                                                     Savings accounts (non-MiFID
         insurance plans and saving accounts)
        financial     16%                50%              4%        30%              products)
        advisors
          N=70                                                                       Investment-linked insurance
                                                                                     plans (non-MiFID products)

                   0%        10% 20% 30% 40% 50% 60% 70% 80% 90% 100%



It was generally observed that independent financial advisors (IFAs) tend to propose riskier
investments compared to banks (about 72% of MiFID products recommended by IFAs were deemed
as relatively high risk, compared to 53% for banks).



b) Drivers of investment unsuitability

Based on mystery shopping data analysis (exclude non-MiFID products)
Percentage of unsuitable investments which may be attributed to the following factors


                                                                                          N=417
                            8%
            Banks                5%                                                     Unsuitability due to high
           N=382                                                                        investment risk and poor
                                                                          87%           liquidity

                                                                                        Unsuitability due to poor
                                                                                        investment liquidity only
                            6%
     Independent
                                 6%                                                     Unsuitability due to high
  financial advisors
                                                                           88%          investment risk only
       N=35


                       0%    10% 20% 30% 40% 50% 60% 70% 80% 90% 100%




                                                                                                              Page | 89
c) Source of products

Breakdown of products recommended by banks

Based on mystery shopping data analysis
Percentage of recommended investments which fall into the following categories


                                                                                                               N=1014
     Suitable investments              18%
      (MiFID products)                                                                 82%


  Unsuitable investments                  20%
    (MiFID products)                                                                 80%


  Savings accounts (non-
     MiFID products)                                                                                100%

      Investment-linked                                  42%
    insurance plans (non-
       MiFID products)                                              58%


                            0%       10%     20%   30%    40%      50%    60%    70%    80%     90%     100%


                                 Third-party investment products           Firm's investment products




Breakdown of products recommended by independent financial advisors (IFAs)
Based on mystery shopping data analysis
Percentage of recommended investments which fall into the following categories


                                                                                                               N=70
   Suitable investments                                                                      91%
    (MiFID products)           9%

         Unsuitable
                                                                                  77%
     investments (MiFID
          products)                       23%


     Savings accounts                                                                               100%
   (non-MiFID products)        0%

    Investment-linked
                                                                                        86%
  insurance plans (non-
     MiFID products)             14%


                          0%        10%    20%     30%    40%    50%      60%    70%    80%    90%      100%


                               Third-party investment products         Firm's investment products


It was also noted that banks tend to propose their own investment products (which account for 80%
of their recommendations), rather than products from third-party financial entities.

Conversely, 83% of the investments recommended by IFAs tend to be products from other financial
players. Since the study is not privy to the internal incentive structures of individual financial entities
(to assess the impact of commission on the advisors‟ investment recommendations), it may be
partially inferred that banks may be constrained in their flexibility to offer suitable investment options,

                                                                                                                   Page | 90
due to their limited product range. By the same token, financial advisors may have a higher
propensity to introduce suitable investments, as they would typically have a wider range of products
to choose from.




                                                                                            Page | 91
5.4 Assessment of advisory process for suitable and unsuitable products

The following section shows the extent of MiFID compliance between suitable and unsuitable
recommended investments (excluding non-MiFID products).

5.4.1 Due diligence

a) Assessment of due diligence components: Client’s investment objectives

i. Suitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements
Percentage of advisors who asked about the following areas relating to the client’s investment objectives


                                                                                                  N=308
       Investment
                                              80%                              20%
         purpose

                                                                                                Yes
 Desired length of
                                                89%                               11%
   investment                                                                                   No


      Risk profile /
                                               84%                               16%
        appetite


                       0%   10%   20%   30%   40%    50%   60%    70%   80%    90%     100%




ii. Unsuitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements
Percentage of advisors who asked about the following areas relating to the client’s investment objectives



       Investment                                                                                 N=417
                                               84%                               16%
         purpose

                                                                                                Yes
 Desired length of
                                                 92%                                 8%
   investment                                                                                   No


      Risk profile /
                                                 91%                                 9%
        appetite


                       0%   10%   20%   30%   40%    50%   60%    70%   80%    90%     100%




                                                                                                            Page | 92
b) Assessment of due diligence components: Client’s financial knowledge
   and investment experience

i. Suitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements
Percentage of advisors who asked about the following areas relating to the client’s financial knowledge and
investment experience


                                                                                                   N= 308
           Profession                43%                              57%

                                                                                                   Yes

       Education level        19%                             81%                                  No


      Prior investment
                                                 76%                              24%
         experience


                         0%   10%    20%   30%    40%   50%   60%    70%    80%    90%   100%




ii. Unsuitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements
Percentage of advisors who asked about the following areas relating to the client’s financial knowledge and
investment experience


                                                                                                   N= 417
           Profession                  50%                               50%

                                                                                                   Yes

       Education level         24%                             76%                                 No


      Prior investment
                                                  81%                              19%
         experience


                         0%   10%    20%   30%    40%   50%   60%    70%    80%    90%   100%




                                                                                                              Page | 93
c) Assessment of due diligence components: Client’s financial situation

i. Suitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements

Percentage of advisors who asked about the following areas relating to the client’s financial situation

                                                                                                     N= 308
  Regular transactions
                                 29%                               71%
   and expenditures

                                                                                                     Yes
       Current level of
          financial              29%                               71%                               No
        commitments


 Personal income and
                                           51%                              49%
     other assets


                          0%   10%    20%    30%   40%   50%    60%    70%    80%    90%   100%




ii. Unsuitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements

Percentage of advisors who asked about the following areas relating to the client’s financial situation

                                                                                                     N= 417
  Regular transactions
                                     35%                              65%
   and expenditures

                                                                                                     Yes
       Current level of
          financial                  38%                              62%                            No
        commitments


 Personal income and
                                             61%                              39%
     other assets


                          0%   10%    20%    30%   40%   50%    60%    70%    80%    90%   100%




                                                                                                              Page | 94
5.4.2 Transparency - comprehensiveness of financial advice

a) Assessment of transparency components: Information about the firm

i. Suitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements

Percentage of advisors who provided the following information about the firm


                                                                                            N= 308

   Name and contact
                                          62%                             38%
     details of firm
                                                                                           Yes

                                                                                           No

  Firm's authorisation
       to provide                                 90%                             10%
   investment advice



                         0%   10%   20%   30%   40%    50%   60%   70%   80%    90% 100%




ii. Unsuitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements

Percentage of advisors who provided the following information about the firm


                                                                                            N= 417

   Name and contact
                                                      94%                          6%
     details of firm
                                                                                           Yes

                                                                                           No

  Firm's authorisation
       to provide                         62%                             38%
   investment advice



                         0%   10%   20%   30%   40%    50%   60%   70%   80%    90% 100%




                                                                                                     Page | 95
b) Assessment of transparency components: Information about the firm’s
   financial instruments

i. Suitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements

Percentage of advisors who provided the following information about the firm’s financial instruments (for specific
investment recommendations)

                                                                                                   N= 308

      Explanation of
                                                  84%                               16%
    investment details
                                                                                                  Yes

                                                                                                  No

       Explanation of
                              12%                             88%
      investment risks



                         0%    10%   20%   30%   40%    50%    60%   70%    80%    90% 100%




ii. Unsuitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements

Percentage of advisors who provided the following information about the firm’s financial instruments (for specific
investment recommendations)

                                                                                                   N= 417

      Explanation of
                                                  85%                               15%
    investment details
                                                                                                  Yes

                                                                                                  No

       Explanation of
                              14%                             86%
      investment risks



                         0%    10%   20%   30%   40%    50%    60%   70%    80%    90% 100%




                                                                                                            Page | 96
c) Assessment of transparency components: Information about the firm’s
   charges

i. Suitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements

Percentage of advisors who provided information on the firm’s investment charges

                                                                                                N= 308



                                                                                                Yes
    Information about
                                                77%                             23%             No
    the firm's charges




                         0%   10%   20%   30%   40%   50%   60%    70%    80%      90%   100%



ii. Unsuitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements

Percentage of advisors who provided information on the firm’s investment charges

                                                                                                N= 417



                                                                                                Yes
    Information about
                                                80%                                20%          No
    the firm's charges




                         0%   10%   20%   30%   40%   50%   60%    70%    80%      90%   100%




                                                                                                         Page | 97
5.4.3 Transparency - Clarity of financial advice

a) Assessment of transparency components: Information about the past
   performance of the financial product

i. Suitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements

Percentage of advisors who clarified that past performance may not be a reliable indicator of future results (based
on those who provided information on the past performance of the proposed investment product)


                                                                                        N= 209
 Information on past
                                               94%                            6%
     performance
                                                                                      Clarification provided
                                                                                      No clarification provided
                       0%   10% 20% 30% 40% 50% 60% 70% 80% 90% 100%



ii. Unsuitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements

Percentage of advisors who clarified that past performance may not be a reliable indicator of future results (based
on those who provided information on the past performance of the proposed investment product)


                                                                                       N= 293
 Information on past
                                               95%                            5%
     performance
                                                                                      Clarification provided
                                                                                      No clarification provided
                       0%   10% 20% 30% 40% 50% 60% 70% 80% 90% 100%




                                                                                                               Page | 98
b) Assessment of transparency components: Information about the future
   performance of the financial product

i. Suitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements

Percentage of advisors who clarified that forecasts may not be a reliable indicator of future performance (based on
those who provided projections on the future performance of the proposed investment product)


                                                                                          N= 172
       Information on
                                         68%                           32%
          forecasts
                                                                                         Clarification provided
                                                                                         No clarification provided
                        0%   10% 20% 30% 40% 50% 60% 70% 80% 90% 100%



ii. Unsuitable investments (exclude non-MiFID products)
Evaluating against MIFID requirements

Percentage of advisors who clarified that forecasts may not be a reliable indicator of future performance (based on
those who provided projections on the future performance of the proposed investment product)


                                                                                          N= 218
       Information on
                                        67%                            33%
          forecasts
                                                                                         Clarification provided
                                                                                         No clarification provided
                        0%   10% 20% 30% 40% 50% 60% 70% 80% 90% 100%




                                                                                                            Page | 99
6. Summary of results
         Despite the observed limitations in the collection of client information by advisors, over 40%
          of investment recommendations were deemed to be suitable. Interestingly, there was no
          significant difference to which advisors followed the MiFID guidelines, between those who
          proposed suitable investments and those who proposed unsuitable investments. This
          observation is generally consistent with findings across scenarios, types of investment
          products, financial players, and EU Member States.


         This suggests that in a number of cases, the advisors‟ investment recommendation may
          have been influenced by other biases:
          -    It was observed that a significant number of advisors had recommended investments
               carried by their own banks. In some instances, it is possible that advisors who
               recommended „unsuitable products‟ may have done so because they were limited by the
               range of products carried by their firms, rather than as a result of an in-depth
               understanding of the shoppers‟ investment needs and profiles. Likewise, advisors who
               proposed „unsuitable investments‟ may have been constrained by the available pool of
               products offered by their firms (which was also illustrated in a recent survey conducted
               by Italian consumer organization, Altroconsumo, where it was observed that advisors
               tend to recommend products offered by their own banks, regardless of their clients‟
               financial and risk profiles)33.
          -    In some countries, advisors appear to have been generally cautious in their product
               recommendations, as illustrated by the high incidence of savings accounts being
               proposed in countries such as Cyprus, Greece and Spain.
          -    Conversely, advisors who proposed unsuitable products, despite exercising greater
               diligence during the advisory process, may have applied their own judgement on what
               constitutes a „suitable investment‟, based on their interpretation of the shopper‟s profile.


         In view of the points above, the study also notes that the advisory engagement should not
          be viewed as a „checklist‟ of MiFID guidelines, having considered that the actual diagnosis of
          „investment suitability‟ is a complex and relatively cognitive process, subject to the advisor‟s
          own personal experience and judgement. It is foreseeable that an advisor might have
          fulfilled all the required MiFID requirements (from a process perspective) and yet fails to
          arrive at a suitable recommendation.


         However, this does not suggest that the advisory process is redundant in preventing „market
          failure‟, since by adhering to such guidelines, advisors are at least covering the baseline
          prerequisites for effective information gathering. The fact that a significant number of
          advisors failed to conduct a comprehensive and analytical collection of client information
          suggests that most advisors may not have even obtained an adequate baseline
          understanding about their clients.




33
   The survey conducted by Altroconsumo was done across 80 branches of leading Italian banks in Milan, Turin and Rome.
The survey results indicated that the banks‟ adherence to MiFID had been generally insufficient (for example, the assessment
of risk profiles was found to be inadequate - only a few bank branches had requested their clients to complete a formal
questionnaire on this aspect). Investment proposals were found to be generally unsuitable and seem to be skewed towards
products offered by the bank, rather than being grounded on the client‟s needs and profile.

                                                                                                                 Page | 100
7. Appendices

7.1 List of cities targeted for mystery shopping

Countries with 50 - 60 visits

 Belgium                        Czech Republic     France
  Bruxelles                       Praha             Paris
  Antwerpen                       Brno              Marseille
  Gent                            Ostrava           Lyon
                                   Plzen             Nice
                                   Liberec           Toulouse
 Germany                        Greece             Hungary
    Berlin                      Athínai             Budapest
    Hamburg                     Thessaloníki        Debrecen
    München                     Pátrai              Miskolc
    Köln                                             Győr
    Frankfurt
 Italy                          Netherlands        Poland
  Roma                          Amsterdam         Warszawa
  Milano                        Rotterdam         Kraków
  Napoli                        's-Gravenhage     Łódź
 Portugal                       Romania            United Kingdom
  Lisboa                          Bucureşti         London
  Porto                           Timişoara         Cardiff
  Vila Nova de Gaia               Iaşi              Glasgow
                                   Cluj-Napoca       Belfast
                                                      Manchester
                                                      Birmingham




                                                                    Page | 101
Countries with 30 - 40 visits

 Austria                        Bulgaria             Cyprus
  Wien                            Sofia             Levkosía
  Graz                            Plovdiv           Lemesós
                                   Burgas            Paphos
                                   Ruse
                                   Varna
 Denmark                        Estonia              Finland
  København                     Tallinn             Helsinki
                                 Tartu               Espoo


 Ireland                        Latvia               Lithuania
  Dublin                        Riga                Vilnius
  Cork                                               Kaunas

 Luxembourg                     Malta                Slovakia
    Luxembourg                    Valetta           Bratislava
    Esch-sur-Alzette              Birkirkara        Košice
    Differdange                   Mosta
    Dudelange                     Qormi
                                   St. Paul’s Bay
                                   Zabbar

 Slovenia                       Sweden
    Ljubljana                     Stockholm
    Maribor                       Göteborg
    Celje                         Malmo
    Velenje                       Uppsala




                                                                    Page | 102
7.2 List of financial players targeted for mystery shopping

       Austria
       Banks
       BA-CA
       BAWAG P.S.K
       Erste Bank
       Raiffeisenbank
       Sparkasse
       Volksbanken sector
       Financial Advisors
       AWD Österreich
       Generali FinanzService GmbH
       Jung, DMS & Cie. GmbH

       Belgium
       Banks
       Citibank Belgium
       Dexia
       Fortis Bank
       ING
       KBC Groep
       Financial Advisors
       Guardian Wealth Management

       Bulgaria
       Banks
       DSK Bank
       Eurobank EFG Bulgaria
       First Investment Bank
       UniCredit Bulbank
       United Bulgarian Bank
       Financial Advisors
       Credit Centre
       EBbP (EVER)
       Puldin

       Cyprus
       Banks
       Alpha Bank Cyprus Ltd.
       Bank of Cyprus Public Company Ltd.
       Hellenic Bank Public Company Ltd.
       Marfin Popular Bank Public Co. Ltd
       Financial Advisors
       3D Global Independent Financial Advisors

                                                              Page | 103
Czech Republic
Banks
Česká Sporitelna
ČSOB
Komercní Banka
UniCredit
Financentrum a.s.
Financial Advisors
AWD Group
Lafin Invest Ltd

Denmark
Banks
Danske Bank
Jyske Bank
Nordea Bank Denmark
Sydbank
Spar Nord Bank A/S

Estonia
Banks
Danske Bank
Nordea Bank
Swedbank
SEB
Financial Advisors
AS Trigon Wealth Management
Evli Securities AS

Finland
Banks
Nordea Bank
OP Bank
Sampo Bank

France
Banks
Banque Populaire
BNP Paribas
Caisse d’Épargne
CCF HSBC
CIC




                              Page | 104
Germany
Banks
Commerzbank
Deutsche Bank
Deutsche Postbank AG
HypoVereinsbank (HVB)
Sparkasse
Financial Advisors
AWD Holdings AG
Deutsche Vermogensberatung Aktiengesellschaft (DVAG)
MLP Finanzdienstleistungen AG
OVB Holding AG

Greece
Banks
Agricultural Bank Of Greece SA
Alpha Bank SA
Bank Of Piraeus SA
EFG Eurobank Ergasias SA
National Bank Of Greece SA
Financial Advisors
Axeon

Hungary
Banks
CIB Bank
Erste Bank
K&H Bank
OTP Bank
Raiffeisenbank, Hungary
Financial Advisors
AWD
First Hungarian Financial Planning Ltd (EMPTK)

Ireland
Banks
Allied Irish Banks PLC
Bank of Ireland
National Irish Bank
Permanent tsb
Ulster Bank Group
Financial Advisors
Investwise




                                                       Page | 105
Italy
Banks
Banca Monte Dei Paschi Di Siena Spa
Banco Populare
Intesa Bank
UBI Banca
Unicredit Bank

Latvia
Banks
Citadele
SEB banka
Swedbank AS

Lithuania
Banks
AB bankas
Nordea
SEB Vilniaus Bankas
Šiauliu Bankas
Swed Bank
Ukio Bankas
Financial Advisors
Finasta
Geroves valdymas

Luxembourg
Banks
Banque et Caisse d'Empargne de l'Etat, Luxembourg
Banque Raiffeisen
BGL BNP Paribas
Dexia BIL
Financial Advisors
De Vere
Fund Advisers

Malta
Banks
APS Bank Ltd
Bank of Valletta plc
HSBC Bank Malta
Lombard Bank Malta plc




                                                    Page | 106
Netherlands
Banks
ABN Amro Bank
ING
Rabobank
SNS Bank
Financial Advisors
Spectrum IFA Consultants

Poland
Banks
Bank Millennium SA
Bank Zachodni WBK
BRE Bank SA
ING Bank Śląski SA
PKO Bank SA
Bank PEKAO SA
Multibank
Financial Advisors
Expander
Open Finance
Xelion

Portugal
Banks
Banco Espírito Santo (BES)
Montepio
Caixa Geral de Depósitos (CGD)
Millennium BCP

Romania
Banks
Banca Comerciala Romana—Erste Bank
Banca Transilvania
BRD Groupe Société Générale
CEC Bank
Raiffeisenbank




                                     Page | 107
Slovakia
Banks
CSOB Bank
Dexia Bank
Fincentrum
ING
OTP Banka Slovensko
Postova Banka
OVB AG
Financial Advisors
AWD
Salve Group SA

Slovenia
Banks
Abanka Vipa
Banka Celje
Banka Koper
Nova Ljubljanska banka
Poštna banka Slovenije

Spain
Banks
Banco Bilbao Vizcaya Argentaria SA (BBVA)
Banco De Sabadell SA
Banco Popular Espanol SA
Banco Santander SA
Bankinter SA
Financial Advisors
Abante Consejeros Financieros Independientes, Eafi, Sa
Capitalia Familiar, Eafi, Sl
Dracon Partners Eafi, Sl
Wealth Solutions, Eafi, Sl




                                                         Page | 108
Sweden
Banks
Danske Bank
Nordea Bank AB
SE Banken
Svenska Handelsbanken AB
Swedbank AB
Financial Advisors
Exceed Värdepappersaktiebolag
Max Matthiessen Värdepapper AB
Solvum Fond & Försäkring AB

United Kingdom
Banks
Barclays PLC
HSBC Holdings PLC
Lloyds Banking Group PLC
Royal Bank Of Scotland Group PLC
Financial Advisors
Honister Capital
Nationwide
Phoenix Wealth Management LLP
Smith & Williamson
Yorkshire




                                   Page | 109
7.3 Mystery shopping sample across EU Member States

     Country     Number of shops            Cities    Number of shops
                  (country-level)                       (city-level)
Austria                40           Wien                    27
                                    Graz                    13
Belgium                50           Bruxelles               19
                                    Antwerpen               17
                                    Gent                    14
Bulgaria               40           Sofia                   14
                                    Plovdiv                  6
                                    Burgas                   8
                                    Ruse                     5
                                    Varna                    7
Cyprus                 30           Levkosía                15
                                    Lemesós                  8
                                    Paphos                   5
                                    Larnaca                  2
Czech Republic         50           Praha                   17
                                    Brno                    12
                                    Ostrava                 14
                                    Plzen                    4
                                    Liberec                  3
Denmark                39           København               23
                                    Arhus                    9
                                    Frederiksberg            3
                                    Hellerup                 1
                                    Hojbjerg                 1
                                    Hvidovre                 2
Estonia                30           Tallinn                 18
                                    Tartu                   12
Finland                40           Helsinki                26
                                    Espoo                   13
                                    Leppavaara               1
France                 60           Paris                   17
                                    Marseille               18
                                    Lyon                    18
                                    Nice                     2
                                    Toulouse                 5
Germany                60           Berlin                  19
                                    Hamburg                 17
                                    München                 15
                                    Köln                     5
                                    Frankfurt                4



                                                                        Page | 110
        Country   Number of shops              Cities    Number of shops
                   (country-level)                         (city-level)
Greece                  50           Athínai                   26
                                     Thessaloníki              12
                                     Pátrai                    12
Hungary                 50           Budapest                  23
                                     Debrecen                  13
                                     Miskolc                   12
                                     Győr                       1
                                     Szombathely                1
Ireland                 40           Dublin                    22
                                     Cork                      18
Italy                   60           Roma                      24
                                     Milano                    20
                                     Napoli                    16
Latvia                  30           Riga                      30
Lithuania               40           Vilnius                   20
                                     Kaunas                    20
Luxembourg              30           Luxembourg                21
                                     Esch-sur-Alzette           6
                                     Differdange                1
                                     Dudelange                  2
Malta                   30           Valetta                   10
                                     Birkirkara                 7
                                     Mosta                      5
                                     Qormi                      4
                                     St. Paul’s Bay             2
                                     Zabbar                     2
Netherlands             50           Amsterdam                 18
                                     Rotterdam                 17
                                     's-Gravenhage             14
                                     Amstelveen                 1
Poland                  60           Warszawa                  21
                                     Kraków                    20
                                     Łódź                      19
Portugal                50           Lisboa                    20
                                     Porto                     15
                                     Vila Nova de Gaia         15
Romania                 50           Bucureşti                 20
                                     Timişoara                 12
                                     Iaşi                      15
                                     Cluj-Napoca                3
Slovakia                40           Bratislava                30
                                     Košice                    10



                                                                       Page | 111
        Country   Number of shops            Cities   Number of shops
                   (country-level)                      (city-level)
Slovenia                30           Ljubljana              10
                                     Maribor                10
                                     Celje                   4
                                     Velenje                 3
                                     Koper                   1
                                     Kranj                   1
                                     Zalec                   1
Spain                   60           Madrid                 27
                                     Barcelona              20
                                     Valencia               13
Sweden                  40           Stockholm              20
                                     Göteborg               12
                                     Malmo                   5
                                     Uppsala                 3
United Kingdom          60           Manchester             19
                                     Cardiff                11
                                     London                 10
                                     Glasgow                 9
                                     Birmingham              7
                                     Belfast                 4




                                                                    Page | 112
7.4 Mystery shopping scenarios and briefing notes

Synovate have worked in conjunction with our mystery shopping strategic partner, Bare international
in order to complete these mystery shops. Bare have a significant number of mystery shoppers both
globally and throughout Europe, and as such, they are very well positioned to undertake a high
volume mystery shopping programme of this nature. For this programme only high calibre mystery
shoppers will be used who are experienced within the financial industry and who have performed
reliably in the past.

Within each of the scenarios, shoppers quoted appropriate levels of income, savings and inheritance
according to the country in which they were undertaking their mystery shops. Within the scenarios
detailed below, these figures are replaced with “XXXX” as each country used different bespoke
amounts.


PROJECT SPECIFIC GUIDELINES

1.1 Hot points and key issues


                   Provide BARE with your planning date within 24 hours after receiving the
 Deadline
                   assignment.



                   Visits should be performed from Monday to Friday during opening hours. No
 Timings
                   visits on Saturday or Sunday.


                   You must not be an existing customer of the bank/investment firm that
 Important
                   you are due to mystery shop.


                   The visit must be conducted in local language.
 Language
                   Questionnaires must be filled out in English.



                   First you must call the bank/investment location assigned to you to
                   express interest to receive advice on low risk investment products.

                   Then you must visit this bank/investment location to complete an
                   interview with the financial advisor and discuss your needs (as detailed
                   within your scenario). You must measure the information captured by the
                   advisor, the information provided to you and what specific product
                   recommendation is made.
 Scenario
                   1. During your call:

                           You must express interest to receive advice on low risk investment
                           products.
                           You must ask whether it‟s best to book an appointment with a
                           financial advisor in advance of visiting the branch.
                           If you are recommended to book an appointment, then you must
                           follow through and book it for the soonest available slot and attend
                           this appointment at the booked time.


                                                                                            Page | 113
                        After the appointment has been booked but before you hang up,
                        please double check with the staff member that the person you‟re
                        booked in to see will be able to provide you with all the necessary
                        information and advice regarding low risk investment products.
                        If you are not recommended to book an appointment, you must
                        check if there will definitely be someone available to speak to who is
                        qualified to provide investment advice. If so, we advise you to do a
                        walk-in visit as soon as possible.
                        You must clarify on the phone that the advisor you are scheduled to
                        see will be able to provide you with recommendations on investment
                        products.
                        You must clearly state that you wish to speak to someone about low
                        risk investment products - not savings products.

                2. During your visit:

                        If you book an appointment in advance of your visit, you must then
                        attend this appointment with the financial advisor.
                        You will not be required to take out an investment product, but you
                        must give the impression you are serious about taking out an
                        Investment Product.
                        Your objective is to receive a recommendation from the advisor.
                        At the end of the interview, you should say that you wish to think
                        about it before making a decision.
                        If the advisor doesn‟t give you a low risk investment product
                        recommendation spontaneously, you must prompt for it.

                It is important that you‟re dressed decently during your mystery visit.
                Men: No jeans, a jacket, a button down shirt, leather shoes (no sandals or
Clothing        sneakers) in good condition and well waxed.
                Women: Pants or skirt, long-sleeve blouse or sweater, leather shoes (no
                sandals or sneakers).

                As a proof of visit you need to fill out what building / shop / office was
                visible to the left and the right of the bank or financial advisor.

                You are required to scan and upload all materials provided throughout
                your mystery shop including:
                    - Business card
Proof of shop       - Product information
                    - Investment leaflets
                    - Any additional documentation handed to you by the advisor

                If the advisor you spoke with did not give you his/her business card
                spontaneously, you have to ask for it yourself at the end of your visit.



                Your questionnaire must be completed in English and submitted within 24
Reporting
                hours of your visit.




                                                                                             Page | 114
BACKGROUND

The Markets in Financial Instruments Directive (MiFID) was introduced in 2007 in accordance with
the Financial Services Action Plan, replacing the Investment Services Directive. It sought to
strengthen the community legislative framework for investment services, and regulated markets, with
a view to furthering two major objectives:

        To protect investors and safeguard market integrity by establishing harmonised
        requirements governing the activities of authorised intermediaries;
        To promote fair, transparent, efficient, and integrated financial markets

Inter alia, MiFID has been introduced to ensure advisors are operating with fairness and
transparency, when providing information and recommendations.


RESEARCH OBJECTIVES

The key Research Objectives of this study are to understand how financial advisors are
positioning and recommending Retail Investment Products and whether they are providing
the required information and suitable recommendations, specifically looking at:

        Whether advisors are gathering all necessary information from the customer
        Whether advisors are transparent in the information being provided
        Whether advisors are providing comprehensive information about the Retail Investment
        Products proposed
        Whether advisors are clear about the different information including associated costs and
        charges
        Whether the advisor makes a suitable product recommendation and if so, what this
        specifically is


METHODOLOGY

As a requirement for completing this interview as a non-customer you must have all of the following
with you on the day of your visit:

        A telephone number you are willing to provide
        A valid form of ID (Passport, Full driving license (photo only), Utility bill, bank or credit card
        statement, Valid debit or credit card)
        You may be asked to bring some documentation with you for your visit to the location (such
        as payslips, employment history, pension details). We do not want you to do this, so when
        you arrive for your appointment and if you‟re asked whether you have brought the
        documentation, please say that you‟ve been so busy you haven‟t had the opportunity to look
        for it. Please say however that you will be able to answer any financial questions relating to
        your personal circumstances. (say this in your own words)

During your call you may be asked to bring some documentation with you for your visit to the
location (such as payslips, employment history, pension details). We do not want you to do this, so
when you arrive for your appointment and if you‟re asked whether you have brought the
documentation, please say that you‟ve been so busy you haven‟t had the opportunity to look for it.

Please say however that you will be able to answer any financial questions relating to your personal
circumstances. (say this in your own words) This will ensure you will be able to undergo an
appointment with the advisor and they will be able to provide you with information and a
recommendation. (As above, please do bring proof of ID in the form of a passport/driving
licence/utility bill).


                                                                                                Page | 115
SCENARIO

1. Attending the bank/investment firm where your appointment has been booked for.

Upon arrival, explain that you have an appointment with or would like to talk to a financial advisor
that provide you more information on low risk investment products. Please ensure you are not late
for your appointment, ideally arriving approx. 5/10 minutes early.


2. Scenario and profile:

This enquiry provides you with your motivation for visiting the location and enquiring about
investment options. We haven‟t given you specific instructions as to how to approach the scenario,
as we understand this will need to be done in the manner most natural to yourself. However, you
must ensure that all of the information listed below is provided to the advisor during the course of the
customer experience.

Please note you must not be an existing customer of the company we are asking you to mystery
shop.


Scenario 1: Married professional


Your character is married between the ages of 30 – 40 OR between 40 - 65


Your character currently works within an office and holds a managerial role within the
Marketing industry. Please prepare a specific company prior to your meeting so you are
prepared to talk briefly about your role, if asked by the advisor. Please also ensure this
company is not within the Financial Sector.


Your character currently earns €XXX per annum and you are the main earner in the marriage.
Your husband/wife also works part time and earns approx. €XXX per annum.
Your household income is therefore approx. €XXX
You jointly rent a property and have been in the same property for approx. 6 years. (please
only provide this information if specifically asked for it)
You have recently inherited €XXX. You would now like to invest your inheritance in an
investment product, with the view of growing your personal wealth. You would therefore like a
recommendation as to which product would be best for this.
You currently have savings of between €XXX and you currently contribute approx. 10% of your
salary into this each month.
Your intention is to keep your investment and savings separate, however if the advisor begins
talking about the possibility of combining them, you can be receptive to this. Here you could
say, ‘I already have X in savings and here is X which I’d like to invest’
You have a basic degree in an Arts based degree of your choice, e.g. Sports Science, Drama,
Art, Science... Please ensure you do not choose a Financial/Business based degree as you
must appear to not have a financial background.


Your character has two children (ages will depend on your profile age) and now wants to set
something up in order to save for their future. If you are between the age bracket of 30 – 40,


                                                                                               Page | 116
please say children are younger than 10, and if you‟re between the age bracket of 40 – 65,
please say your children are older than 10. (you may specify the age, however please ensure
the ages quoted follow the guidelines above)
The types of monthly outgoings you have will include rent payments, utility bills, food
shopping, children‟s clothing and education expenses, potentially car running costs etc..
Please consider these carefully before undertaking your mystery shop to ensure that you are
totally clear on your level of income and outgoings each month.
Your investment objective is to increase capital by the end of the investment term in order to
have money for your children‟s future, however currently you‟re not 100% sure on the best
way of doing this.
You‟re seeking to receive a higher reward than you would from a traditional savings account,
and if the advisor begins steering you down the route of a savings account, remind them that
this is the case and you wish to talk about investment options.


You have a top-line understanding of some of the investment options available but now wish to
speak to someone in more depth to further your understanding of what might be most
appropriate. (Information on some of the different options is detailed at the end of this scenario
sheet). You have very little experience in monetary investments.


If asked which bank your character currently banks with, please specify a local bank with no
international presence. Under no circumstances should you state that you presently bank with
the bank/building society/organisation you are visiting.
If asked whether you would like to invest you money in property, please say that you don‟t
want to do this as potentially you may have to move in the future for your job.


Even though you are investing for your children‟s future, you want the flexibility to be able to
access your money if necessary. Your investment should include the facility for de-investment
before maturity and therefore allow you to have access if required. As justification for this
request, you could say you‟d like this option just in case of an emergency. Ensure you say this
to your advisor as it will influence the type of product they recommend to you.


If asked about your risk appetite, you should get across that you wish to gain some return from
your investment but that you don‟t want to risk losing your investment in the hope of gaining
greater financial reward.
You want security with your investment.


At this stage you don‟t want the investment to be longer than a period of 5 years to ensure you
have the opportunity to review and potentially change it after this period of time.


As part of your interview with the advisor, you may be asked to complete a „Risk Profile‟. This
will entail you needing to place yourself on a rating scale that indicates how risk averse you
are as a person. For example, this is sometimes shown on a 10 point scale (10 meaning
you‟re happy to take a high level of risk, 1 meaning you don‟t want any risk) so please rate
yourself as 3 in this instance.
You can have a look at some examples of rating scales or risk profile questionnaires over
here: 1 2 3.
If you are given a different rating scale, please ensure you rate yourself in the equivalent to
above. (e.g. if you have a 7 point rating scale, please rate 2)



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Scenario 2: Single professional



Your character is not married between the ages of 25 - 35.


Your character currently works within an office and holds a managerial role within the
marketing industry (please prepare a specific company prior to your meeting so you are
prepared to talk briefly about your role, if asked by the advisor. Please also ensure this
company is not within the Financial Sector)


Your character currently earns €XXX per annum.
You live on your own in rented accommodation (flat or house).
You have recently inherited €XXX. You would now like to invest your inheritance into an
investment product, with the view of growing your personal wealth. You would therefore like a
recommendation as to which product would be best for this.
You currently have savings of between €XXX and you currently contribute approx. 10% of
your salary into this each month.
You‟re in a relationship but do not live with your partner.
You character does not have any children.
Your intention is to keep your investment and savings separate, however if the advisor begins
talking about the possibility of combining them, you can be receptive to this. Here you could
say, ‘I already have X in savings and here is X which I’d like to invest’
You have a basic degree in an Arts based degree of your choice, e.g. Sports Science,
Drama, Art, Science... Please ensure you do not choose a Financial/Business based degree
as you must appear to not have a financial background.


You character is looking for a simple investment which in time will potentially go towards
purchasing a property. You feel as though you should be more disciplined and start to save
more for the future.
The types of monthly outgoings you have will include rent payments, utility bills, food
shopping, socialising costs, clothes shopping, potentially car running costs etc. Please
consider these carefully before undertaking your mystery shop to ensure that you are totally
clear on your level of income and outgoings each month.
Your investment objective is to increase your capital by the end of the investment term with a
view to contributing towards purchasing a property in the future. You realise that in 5 years
time, your investment may not have matured to the level required in order to put down a
significant deposit on a property but when it comes to that stage you may have some
additional help from elsewhere (e.g. parents or partner) which would help to supplement.
You‟re seeking to receive a higher reward than you would from a traditional savings account,
and if the advisor begins steering you down the route of a savings account, remind them that
this is the case and you wish to talk about investment options.


You have a top-line understanding of some of the investment options available but now wish
to speak to someone in more depth to further your understanding of what might be most
appropriate. (Information on some of the different options is detailed at the end of this



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scenario sheet). You have very little experience in monetary investments.


If asked which bank your character currently banks with, please specify a local bank with no
international presence. Under no circumstances should you state that you presently bank
with the bank/building society/organisation you are visiting.


Even though you are investing for the purchase of a property, you want the flexibility to be
able to access your money if necessary. Your investment should include the facility for de-
investment before maturity and therefore allow you to have access if required. As justification
for this request, you could say you‟d like this option just in case of an emergency. Ensure you
say this to your advisor as it will influence the type of product they recommend to you.


If asked about your risk appetite, you should get across that you wish to gain some return
from your investment. You‟re seeking to receive a higher reward than you would from a
traditional savings account.
You are however, not prepared to see significant fluctuations in your investment.
You want security with your investment with the potential to gain reward.


At this stage you want the investment to be in place for a period of approx. 5 years at which
point you will look to purchase a property.


As part of your interview with the advisor, you may be asked to complete a „Risk Profile‟. This
will entail you needing to place yourself on a rating scale that indicates how risk averse you
are as a person. For example, this is sometimes shown on a 10 point scale (10 meaning
you‟re happy to take a high level of risk, 1 meaning you don‟t want any risk) so please rate
yourself as 5 in this instance.
You can have a look at some examples of rating scales or risk profile questionnaires over
here: 1 2 3.
If you are given a different rating scale, please ensure you rate yourself in the equivalent to
above. (e.g. if you have a 7 point rating scale, please rate 3)




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3. Examples of low risk investment products

Please note the information below is merely a guide to prepare you for the responses you should be
given in answer to your customer enquiry. This information is for your reference only, and should not
influence the manner in which you complete your evaluation form.

In general, retail investment products can be classified into four categories:
        Pensions
        Investment Products
        Individual savings account
        Endowments and insurance.

The relevant product category here for our study would be Investment Products, which may
comprise:

Transferrable securities
Shares / stock (i.e.          A share represents a unit of ownership interest in a corporation or
Stocks)                       financial asset. A shareholder may receive a dividend in proportion to
                              their shareholding.

Bonds                         Bonds fall under the category of fixed-income securities. The buyer
                              receives periodic interests on his investment. Upon product maturity,
                              he would also receive the principal amount of his initial investment.

                              Bonds usually have a defined term, or maturity, after which the bond is
                              redeemed, whereas stocks may be outstanding indefinitely.

Units in collective investment
Mutual funds               A mutual fund is a portfolio of stock or bonds, which is managed by a
                           professional fund manager.

                              There are various types of mutual funds and they are usually structured
                              with a distinctive focus (e.g. large stocks, small stocks, bonds from
                              governments, bonds from companies, stocks and bonds, stocks in
                              certain industries, stocks in certain countries, etc). Examples:

                              -   Bond funds - a collective investment scheme that invests in bonds
                                  and other debt securities

                              -   Stocks funds - a collective investment scheme that invests in
                                  stocks

                              -   Index funds - a collective investment scheme in which the fund
                                  manager selects a combination of assets for a portfolio that is
                                  intended to mimic an index, such as the Standard & Poor's 500
                                  Index (S&P 500)

Other types of investments
Structured products       Structured products are more complex investment instruments which
                          comprise a combination of investment instruments such as securities,
                          options, indices, commodities, etc.
                          Structured products typically have a fixed term, as well as a "principal
                          guarantee" function (which offers protection of principal if held to
                          maturity).

Alternative investments       These are generally more complex products, which are typically more
                              speculative compared to traditional investments securities and

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                              collective investment schemes.

                              Examples of alternative investments: Options, futures, swaps,
                              forwards, or derivative agreements relating to commodities, currencies,
                              etc


Note: Other investments which may be recommended, but are not covered within the scope
of this study may include:

-   Endowments or investment-linked insurance products
-   Investment-linked saving accounts / bank structured deposits


4. Attending the branch/investment firm where you have been assigned to conduct your
   mystery shop.

    You will not be required to take out an investment product (as such your credit rating will not be
    affected), but you must give the impression you are serious about taking out an investment
    product and allow the advisor to continue through to the recommendation stage. Your objective
    is to receive a recommendation from the advisor. Only at the end of the interview, should
    you say that you wish to think about it before making a decision.

    It is possible that the advisor will state that they need to carry out some further research before
    making a specific recommendation to you. If you‟re unable to get a recommendation on your
    visit, then you must request that you phone the advisor directly for this information at a later
    date. Explain that you‟re extremely busy and will find it very difficult to find the time for a second
    visit. If the advisor explains the only way for him to be able to give a recommendation is for you
    to return for a second visit, then you must return at a later agreed date in order to receive your
    recommendation.

    If the advisor doesn‟t give you a low risk investment product recommendation spontaneously,
    you must prompt for it.

    It is very important you state clearly that you wish to speak to someone in order to receive
    investment advice about investment products - not savings products. In some instances you will
    have advisors who are able to advice about savings, but not investment products.

5. Due Diligence/Information Gathering. The financial advisor should ask a number of questions
   before providing you with a product recommendation including the below points:

            -   Your objectives for making an investment
            -   Desired length of investment
            -   Your risk appetite (the level of risk you‟re prepared to take in order to receive a
                financial return)
            -   Personal income and other assets
            -   Current financial commitments
            -   Your experience with investments
            -   Your level of education and current profession

        As mentioned earlier, it is crucial you carefully read and digest your scenario as that will
        provide all the answers you‟ll need to provide to the above questions.

    Please note, if the advisor begins taking some information, but does not record it/write it down,
    this could mean they are not particularly interested in you as a customer and may therefore not
    go through with providing all information or follow through with a recommendation. If this does
    begin to happen, please re-emphasise to the advisor that you would like to know about the


                                                                                                Page | 121
    different options available and which product is the most suitable for your needs. You should say
    that you‟re very busy and have very limited time in order to attend appointments such as these –
    therefore you‟d like all information today including a recommendation

6. Transparency and comprehensiveness. Within the Evaluation Form are questions designed
   to ascertain how transparent and comprehensive the advisor is throughout your meeting. The
   questions you will need to answer within this section include the following points:
           - Whether you‟re provided with information about the investment firm and its services
           - Whether you received any information in relation to inducements that the advisor
               would receive should you take his product recommendation
           - Whether you were provided with different investment options and if so, how many
           - Which investment products you were informed of and whether they were explained
               in detail
           - Whether the risks associated with each mentioned product are clearly
               communicated
           - Whether you were provided with sufficient and comprehensive information including
               any past performance of relevant products and/or likely performance going
               forwards.
           - Whether you were advised of associated fees and charges to the mentioned
               products
           - Whether all information provided was done so in a clear way that was fair an
               unbiased.
           - Whether you were provided with information about any monetary or non-monetary
               benefits paid or received by the firm in relation to the service provided to you

        Please listen very carefully to all information provided to you throughout your interview and
        make notes throughout to ensure nothing is forgotten.

7. Investment Suitability. This section focuses on the product recommendation that should have
   been made to you and it suitability to your needs (as per your scenario). It also establishes your
   level of satisfaction with the information you‟ve been provided with by the advisor.

    You should be provided with a specific product recommendation by the advisor and when this
    happens, it‟s extremely important that you record the exact name of the product. If you are
    unclear as to what has been recommended to you, you must ask the advisor to clarify what
    precisely their recommendation is.

    In addition to the product names, you should have the following details associated with this
    product:
        - Product category e.g. mutual fund, investment-linked savings account, insurance-linked
             product etc...
        - Risk level of the product
        - Additional information about the product characteristics including product maturity,
             possible penalties or risks for any withdrawal before maturity date if applicable or
             composition of assets (this is what the underlying assets are and where geographically
             they might be based, e.g. Emerging market equities

    If you are approaching the end of the interview and the advisor has only provided general
    information about different products, you must ask what his/her recommendation is.

    Throughout your mystery shop, please use your own personal name, phone number and
    address, however all other details should be consistent with your scenario.

    Throughout your shop, it will be appropriate if you take some notes while speaking to the
    financial advisor, so please be sure to do this to ensure you remember everything you were
    told/asked throughout your meeting. Do not have your questionnaire/briefing guidelines/scenario
    visible while speaking to the advisor and make notes, ideally in such a way so the advisor
    cannot see what you are writing. It will be in line with a typical customer behaviour to make some

                                                                                             Page | 122
    notes on the information being provided to you, and if questioned, please just say that you‟re
    writing down the information being given to you so you don‟t forget what you‟re being told.

    You are required to ask two questions throughout your interview with the advisor:
    1. You must ask the advisor if all products provided by the organisation (bank/building society
       or Investment firm) are products of that company or whether they are from other
       organisations. (e.g. If you‟re visiting Barclays bank, ask „are all the Investment options you
       offer, products of Barclays?‟ Please ask this question in your own word)
    2. Throughout the interview, the advisor may state that they receive a Commission / Incentive if
       they sell a particular product. If the advisor does not say anything about this to you, then at
       the end of the interview we require you to ask if they receive anything for this product. (e.g.
       your could ask, „do you get anything from this product?‟, „do you receive any money as a
       result of selling this product?‟, „‟I assume you receive commission for selling this product?‟
       Please ask this question in your own words) If the advisor has already informed you of this
       information, you will not need to ask this question.

If throughout your interview, the advisor begins talking about insurance products, please re-iterate
that you‟re mainly interested in Investment opportunities at this stage. If you have expressed this
desire and the advisor then continues to recommend Insurance products then please listen to what
the advisor says and record the information in the same way.


BASIC PRINCIPLES OF MYSTERY CUSTOMER RESEARCH
Please click the following link to download the Basic Principles of Mystery Shopping:
http://www.bareinternational.com/BASIC/ENG.pdf


2. GENERAL INFORMATION

2.1 Reasons for non-payment:

        If we do not receive the questionnaires by the due date, without any communication about
        the reason of the delay.
        If we need more information about an aspect of your visit and we do not hear back from you
        after having emailed / left you a message.
        If you do not follow the Guidelines / scenarios correctly.
        Your report is inaccurate or incomprehensible.
        If your bank details are not correctly filled out in our system. (Please check your extended
        profile to ensure that these details are entered and entered correctly).


2.2 Agreement between you and BARE:

If you participate in the Retail Investment Mystery Shopping Program, you have to agree with the
following conditions:

        Neither you, nor your family or friends work for the company you have been allocated to
        visit.
        You will not disclose any confidential information received from BARE (instructions and
        questionnaire) to outside parties.

If we discover that you do not respect these conditions, we will deactivate you as a shopper and will
not reimburse you for this assignment.


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7.5 Mystery shopping evaluation form


Retail Investment Questionnaire
Mystery Shopping Questionnaire

Visit Details

Mystery Shopper Unique ID Code: ...................................................

Branch Name: ...................................................................................

Branch Address: ..............................................................................

Scenario Name: ..................................................................................

Date of Visit with Advisor: ...............................................................

Day of Visit with Advisor: ................................................................

Start Time of Visit with Advisor (HH:MM): ......................................

End time of Visit with Advisor (HH:MM): .........................................

Length of time spent with Advisor (HH:MM): ..................................

Building / Shop / Office visible to the left of branch:
       WRITE IN .................................................................................
       No building visible ................................................................... 1

Building / Shop / Office visible to the right of branch:
       WRITE IN .................................................................................
       No building visible ................................................................... 1

Proof of Visit:
       ATM Receipt ........................................................................... 1
       Cover Confirmation ................................................................. 2




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Visit Opening
   1. What were you told when you phoned the location in advance of your visit?
        a. I was told I should book an appointment and did so
        b. I was told there was no need to book an appointment in advance and that I
            could just visit the branch and see an advisor
        c. Other

   2. If you said „Other‟, to Q1, please explain what was said to you:
   _____________________________________________________________________

   3. Were you able to see the advisor on your first visit to the location?
        a. Yes
        b. No

   4. If you answered No to Q3, did you return later the same day or book an
      appointment for another day?
           a. Returned later that same day
           b. Booked an appointment for another day
           c. Other

   5. If you answered „Other‟ to Q4, please explain what happened:
   _____________________________________________________________________

   6. What was the name of the financial advisor who handled your enquiry?
   _____________________________________________________________________



Due Diligence/Information Gathering
Key Parameters

   7. Did the financial advisor ask what your objectives were for making your personal
      investment?
          a. Yes, I was asked what my objectives were
          b. No, the advisor did not ask me what my objectives were

   8. Did the financial advisor ask you what your desired length of investment was?
          a. Yes, I was asked my desired length of investment
          b. No, the advisor did not ask me what my desired length of investment was

   9. Did the financial advisor establish your risk appetite? (Shopper note: The advisor
      should attempt to understand what level of risk you are prepared to tolerate with
      your investment)
          a. Yes, my risk appetite was established
          b. No, my risk appetite was not established


                                                                                   Page | 125
10. If you answered „Yes‟ to the above question, what did the advisor ask you to
    establish this information? (multi-select)
         a. Preferences towards varying degrees of investment risk-return trade-off. You
            may be asked to describe or select statements to indicate your investment
            attitude and style (e.g. „I prefer investments with little or no fluctuation in
            value and have a low degree of risk associated with them. I am willing to
            accept the lower return associated with these investments‟)
         b. Ability to deal with investment risk (e.g. Are you able to bear the loss of
            some or all of the investment if it performs badly?)
         c. Other

11. How did the advisor record the information regarding your risk appetite?
      a. The advisor wrote this information down
      b. The advisor recorded the information onto their computer
      c. The advisor didn‟t appear to record the information – he/she just listened

12. Did the advisor ask you questions about your personal income and any other
    assets?
        a. Yes
        b. No

13. If you answered „Yes‟ to the above question, which of the following did the advisor
    ask about? (multi-select)
         a. Personal income, including disposable income
         b. Whether you own a property
         c. Current savings/investments
         d. Other

14. If you answered „Other‟, please detail what else the advisor asked about:
    __________________________________________________________________

15. Did the advisor ask you questions about your current level of financial commitment?
        a. Yes
        b. No

16. If you answered „Yes‟ to the above question, which of the following did the advisor
    ask about? (multi-select)
         a. Household / child care cost
         b. Education expenses
         c. Mortgage / Rent commitments
         d. Debts
         e. Other




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17. If you answered „Other‟, please detail what else the advisor asked about:
    __________________________________________________________________

18. Did the advisor establish whether you had experience with investments?
        a. Yes
        b. No

19. When you explained to the advisor that you had very little knowledge of
    investments, did the advisor take the time to explain investment options to you in
    detail?
        a. Yes, I felt the advisor took time to explain the options to me in detail
        b. The advisor did explain the options available although could have provided
            more detail
        c. No, the advisor did not provide sufficient detail about the products available

20. Did the advisor enquire into your current regular transactions or expenditure?
        a. Yes
        b. No

21. Did the advisor ask you about your level of education and current profession?
        a. Yes, the advisor asked me both of the above points
        b. No, the advisor asked me only about my level of education
        c. No, the advisor asked me only about my current profession
        d. No, the advisor did not ask me either of the above

22. Did the advisor record the answers to the questions he/she was asking you?
        a. Yes
        b. No

23. Were you asked to complete a „Risk Profile‟? (Shopper note: this could be a rating
    scale, for example within a form between 1& 10 or 1 & 5)
       a. Yes, I was asked to complete a Risk Profile using a rating scale
       b. Yes, I was asked to complete a Risk Profile, although this was not through
            using a rating scale
       c. No

24. If you answered, „Yes, I was asked to complete a Risk Profile, although this was not
    through using a rating scale‟, please explain what exactly you were asked to
    complete:
_____________________________________________________________________
_____________________________________________________________________




                                                                                  Page | 127
   25. Following the completion of your risk profile, did the advisor explain to you how your
       risk profile is being derived? (Shopper note: e.g. your risk profile is Conservative
       because….‟)
           a. Yes
           b. No

   26. If you answered Yes to Q25, please explain what was said:
   _____________________________________________________________________
   _____________________________________________________________________

   27. Did you feel the advisor was comprehensive with their information gathering?
           a. Totally
           b. To some extent
           c. Not really/at all

   28. Please provide further explanation as to why you chose the above rating:
   _____________________________________________________________________
   _____________________________________________________________________



Transparency and comprehensiveness
Information about the firm

   29. Were you provided with the following details of the bank/investment firm? (Shopper
       note: this may be visible on the Financial Advisor‟s business card)
          a. Advisor name
          b. Bank/Investment firm address
          c. Telephone/Email contact details

   30. Did the advisor provide you with a document or tell you orally that the firm is
       authorised to provide investment advice? (Shopper note: you may need to review
       your documentation after your meeting to answer this)
           a. Yes, the advisor provided a document and told me orally
           b. Yes, the advisor provided a document only
           c. Yes, the advisor told me orally only
           d. No, the advisor did not provide a document or tell me orally

   31. Did this document (or oral communication) include the name/contact address of the
       entity that has authorised this?
           a. Yes
           b. No
           c. N/A – document not provided and not told orally




                                                                                     Page | 128
   32. Did the advisor detail the different service offerings available within their
       branch/investment firm? (e.g. mortgage advice, savings advice etc..)
           a. Yes
           b. No

   33. Please detail the different service offerings listed by the advisor:
   _____________________________________________________________________

Information about Financial Products

   34. Did the advisor provide information on the investment(s) proposed?
           a. Yes
           b. No

   35. How many investment options did the advisor talk to you about?
         a. 0
         b. 1
         c. 2
         d. 3
         e. 4+

   36. From the list below, please select which investment options the advisor discussed
       with you: (Shopper note: please refer to your briefing documents for a clear
       explanation of each of the product types listed below)
           a. Shares/stock (i.e. Stocks)
           b. Bonds
           c. Mutual funds
                    i. Bond funds
                   ii. Stocks funds
                  iii. Index funds
                  iv. Other funds
           d. Structured Products
           e. Alternative investments
           f. Other - please specify:
                    i. Investment-linked insurance plans
                   ii. Saving accounts

   37. Detail exactly which products the advisor discussed with you: (shopper note: please
       detail the precise name of the product/s that were discussed. An example of this
       could be „Barclays Portfolio Trust‟)
   _____________________________________________________________________
   _____________________________________________________________________

   38. If the advisor mentioned Other Products, please specify which were mentioned:
   _____________________________________________________________________
   _____________________________________________________________________

                                                                                       Page | 129
   39. Did the advisor explain in detail the investments proposed to you?
           a. Yes
           b. No
           c. N/A – did not discuss investment options with me

   40. If you answered Yes to Q39, please explain what detail was discussed with you and
       for which product this detail is associated with: (Shopper note: it‟s important you put
       as much detail as possible here. An example could be „Fund comprises a mix of
       equities and bonds, with a higher allocation towards equities from emerging
       markets. Objective of this fund is to mainly generate mainly capital growth.
       Moderately risky - suitable for more adventurous investors)
   _____________________________________________________________________
   _____________________________________________________________________

   41. If you answered No to Q40, please explain why you thought the investments were
       not explained in sufficient detail:
   _____________________________________________________________________
   _____________________________________________________________________

   42. Did the advisor clearly highlight the risks associated with the type of investment(s)
       recommended? (shopper note: please ensure the information you provide is relate
       to a specific product and not just an overall product category)
           a. Yes
           b. No
           c. N/A – did not discuss investment options with me

   43. If you answered Yes to Q42, please detail what was said to you regarding risk:
   _____________________________________________________________________
   _____________________________________________________________________

   44. Did the Advisor indicate the level of risk associated with the investment(s)
       recommended (Shopper note: i.e. „high‟, „mid‟ or „low‟ risk)
           a. Yes
           b. No
           c. N/A – did not discuss investment options with me

   45. If you answered Yes to Q44, please explain how the advisor indicated the level of
       risk (e.g. This is the least risky product within our portfolio of investment products,
       and is compared to that of savings accounts)
________________________________________________________________________
________________________________________________________________________

   46. Which if the following risks were highlighted to you by the advisor:
          a. Description of „risk‟ included the extent or quantum (in term of percentages)
              to which the value of investment may fluctuate, as well as the probability of
              such fluctuation

                                                                                      Page | 130
          b. Description of „risk‟ included the possibility of customer losing his entire
             investment capital
          c. Description of „risk‟ included the types of financial commitments / addition
             obligations required of this investment
          d. Other

   47. If you answered Other to Q46, please explain what risks were highlighted to you:
   _____________________________________________________________________
   _____________________________________________________________________

   48. Did you feel as though you had been given enough information in order to make an
       informed decision?
           a. Yes
           b. No

   49. If you answered No to Q48, please explain what you felt was missing from the
       advisor‟s explanation, to allow you to make an informed decision:
   _____________________________________________________________________
   _____________________________________________________________________


Information about Costs and Charges

   50. Did the advisor clearly indicate any associated fees or charges associated with the
       products listed or the service provided?
           a. Yes
           b. No

   51. If you answered No to Q50, please explain what was said by the advisor relating to
       fees or charges:
   _____________________________________________________________________
   _____________________________________________________________________

   52. Did the advisor clarify the following charges with you? (multi-select)
           a. Upfront charges pertaining to the product and how it was calculated
           b. Remuneration charges of the financial advisor and how it was calculated
           c. Other charges associated with the transaction of the products and how it
              was calculated
           d. None of the above

   53. Did the advisor disclose any of the following information to you including:
           a. When the firm is likely to make a financial gain or avoid loss at the
              customer‟s expense
           b. When the firm has an incentive to favor another client‟s interests over the
              customers (e.g. fees, commissions, or benefits paid by a third party)


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          c. Combination of services that the firm provides that could lead to conflict of
             interests
          d. None of the above

   54. If the advisor provided any of the points listed in Q53, please detail precisely what
       was said:
   _____________________________________________________________________
   _____________________________________________________________________

   Please probe advisor as to whether the recommended products are from the advisor‟s
   company or from other organisations. For example, Barclays may be offering products
   from another bank or financial player. Please detail the advisor‟s response below.

   Please probe advisor as to whether he or she receives any incentive for the
   recommended products, and whether this incentive varies for different product offerings
   carried by the company. Please detail the advisor‟s response below.

Clarity of Information

   55. Was all information given by the advisor clear and presented in a way that was easy
       to understand?
           a. Yes
           b. No

   56. If you answered No to Q55, please explain why:
   _____________________________________________________________________
   _____________________________________________________________________

   57. Did you feel the information given to you by the advisor was presented in a fair way
       that was unbiased? (Shopper Notes: please consider whether the advisor gave a
       fair balance of the benefits and associated risks)
            a. Yes, the advisor presented the information in a fair way
            b. No, the advisor was one sided in favour of benefits
            c. No, the advisor was one sided in favour of risks

   58. If you answered b and c, please explain what made you feel this way:
   _____________________________________________________________________
   _____________________________________________________________________

   59. Did the advisor provide information on the past performance of the discussed
       financial investment products?
           a. Yes
           b. No

   60. If you answered Yes, to Q59, did the advisor make it clear that these figures relate
       to past performance, which may not be a reliable indicator of future results?

                                                                                    Page | 132
          a. Yes
          b. No, but the document delivered included this
          c. No

   61. Did the advisor provide any projections for future performance of the discussed
       financial investment products?
           a. Yes
           b. No

   62. If you answered Yes, to Q61, did the advisor make it clear that these forecasts may
       not be a reliable indicator of future performance?
            a. Yes
            b. No

   63. At any point, did the advisor check if/that you understood what you were being told?
           a. Yes
           b. No

   64. Please rate the extent to which the advisor was forthcoming with information
      provision:
          a. Advisor volunteered information
          b. Advisor provides information only after some probing
          c. Advisor did not provide sufficient information despite probing

   65. Was the information articulated by the advisor consistent with the written / published
       documents provided?
          a. Yes
          b. No

   66. If you answered No to Q65, please explain why:
________________________________________________________________________
________________________________________________________________________



Investment Suitability
Customer and Product Suitability

   67. Did the advisor make a specific product recommendation to you? (Shopper note: in
       order for this to be a recommendation, the advisor should specify that he/she feels
       this product is suitable for your needs and say „this is my advice / this is my
       recommendation for you / this option would suit you best / I recommend this product
       to you...‟




                                                                                     Page | 133
An example of a specific product recommendation could be „Barclays Balanced
Portfolio Trust‟. An example of a more generic non-recommendation would if the
advisor says ‟Mutual Funds are safe investments‟
        a. Yes
        b. No

68. If you answered Yes to Q67, specify the exact name of the product recommended
    to you:
_____________________________________________________________________
_____________________________________________________________________

69. Did the advisor provide additional information on the recommended product, such
    as:
        a. Required investment holding period
        b. Investment liquidity (i.e. what is the impact to your investment should you opt
        for early withdrawal / cash-in? Are there any penalties for doing so?)
        c. Product details, such as:
             Underlying asset classes, (i.e. bonds, equities, hedge funds, property,
               etc)
             Ratings of underlying asset classes (based on reputable rating agencies
               such as Moody's, Standard & Poor's, etc)
             Geographical allocation of asset classes (e.g. Europe, emerging markets,
               etc)
             Capital guarantee (i.e. whether your initial investment capital is protected)
        d. Investment risk (i.e. potential range and probability for which your investment
        value is likely to fluctuate over the term of investment)
        e. Maturity period and penalties for early withdrawal (for products with maturity
        periods)

70. Detail all specific information provided in relation to the product recommended:
_____________________________________________________________________
_____________________________________________________________________

71. Did you feel the product recommended to you by the advisor was suitable for your
    investment needs?
        a. Yes
        b. No

72. If you answered No to Q71, please explain your answer:
_____________________________________________________________________
_____________________________________________________________________




                                                                                   Page | 134
73. How suitable was the advisor‟s recommended product in terms of: (shopper note:
    use the rating scale of 1 to 5, where 1 = „did not meet my requirements at all‟ and 5
    = „perfect for my needs‟)
    a. Your investment requirements, in terms of meeting your:
        Investment objectives (E.g. Preserving capital)
        Desired length of investment
        Risk appetite / tolerance
    b. Your financial situation, in terms of whether you can bear the risks and charges
        associated with the investment)
    c. Your financial knowledge (in terms of whether you have the necessary
        experience and knowledge to understand the investment product risks)

74. Did the advisor demonstrate the following: (Yes/No)
    a. Clear understanding of your investment objectives, financial situation, and
    financial knowledge
    b. Appropriate knowledge relating to the firm‟s investment products and underlying
    risks

75. If you answered No to either a or b above, please explain your answer:
_____________________________________________________________________
_____________________________________________________________________

76. Did the advisor seem biased towards a particular investment product?
    a. Yes
    b. No

77. If you answered Yes to Q76, please explain your answer:
_____________________________________________________________________
_____________________________________________________________________

78. Are there any reasons why you wouldn‟t make this investment, based on your
    experience with the Advisor?
       a. Yes
       b. No

79. Do you think the advisor was proactive in the provision of additional information,
    such as:
       a. Volunteering information about the firm and products
       b. Volunteering information about the costs and charges of the products
       c. Volunteering information about disclosures of conflicts of interests
       d. None of the above




                                                                                  Page | 135
80. How satisfied were you with the information provided to you by the Advisor?
      a. Extremely Satisfied
      b. Satisfied
      c. Neither Satisfied/Dissatisfied
      d. Dissatisfied
      e. Extremely Dissatisfied


81. Please explain your answer to Q80:
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________


82. If you have any further comments that you think are important to share about your
    experience with the financial advisor, or if anything happened during your meeting
    that was either outside the pre-defined process, then please provide this information
    in the comment box provided below:
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
____________________________________________________________________




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