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Sourcebooks / Suitability

Suitability

United Kingdom

UK — Suitability

Source: FCA Handbook, COBS (Conduct of Business Sourcebook) chapter 9.

COBS 9.2.1R

Verbatim clause withheld — the publishing authority's reuse terms do not confirm a right to redistribute the exact text (see sourcebooks/NOTICE-SOURCEBOOKS.md). See the URL above for the original, and "What this means" below for Doshi's own paraphrase.

What this means. A firm must take reasonable steps to check that a personal recommendation fits the client. To do this, the firm must gather 3 things about the client: their knowledge and experience, their financial situation, and their investment objectives. The firm cannot make a suitable recommendation without this information. A firm that skips this step and recommends a product anyway breaks the rule, even if the product turns out to be a good fit by chance. The check must happen before the recommendation, not as a justification after it.

COBS 9.2.2R

Verbatim clause withheld — the publishing authority's reuse terms do not confirm a right to redistribute the exact text (see sourcebooks/NOTICE-SOURCEBOOKS.md). See the URL above for the original, and "What this means" below for Doshi's own paraphrase.

What this means. The firm must have a real, reasoned basis for believing the recommended transaction meets the client's goals. It must also check the client can bear the financial risk, and has the experience to understand the risk. A guess is not enough — the firm needs facts about the client. This rule works with COBS 9.2.1R above: 9.2.1R sets the duty to gather information, and 9.2.2R sets the standard the firm must meet once it has that information. A firm that gathers the facts but still recommends a mismatched product fails 9.2.2R even though it complied with 9.2.1R.

European Union

EU — Suitability

Source: MiFID II (Directive 2014/65/EU) and its Delegated Regulation (EU) 2017/565.

Note: fetched via legislation.gov.uk's EU-retained-law mirror, not eur-lex.europa.eu directly (eur-lex returned empty content on every attempt). This is the UK's domestic copy of the original EU text and can diverge from the current EU-side wording after Brexit. Treat the url field as the retrieval source, not a guarantee of the live EU text.

MiFID II art. 25(2)

When providing investment advice or portfolio management the investment firm shall obtain the necessary information regarding the client's or potential client's knowledge and experience in the investment field relevant to the specific type of product or service, that person's financial situation including his ability to bear losses, and his investment objectives including his risk tolerance so as to enable the investment firm to recommend to the client or potential client the investment services and financial instruments that are suitable for him and, in particular, are in accordance with his risk tolerance and ability to bear losses.

What this means. Before a firm gives investment advice or manages a client's portfolio, it must collect 3 things: the client's knowledge and experience, their financial situation including their ability to bear losses, and their investment objectives including their risk tolerance. The firm cannot recommend a suitable product without this information. The duty applies to portfolio management as well as advice, so a firm cannot sidestep it by calling the service "management" instead of "advice". The same 3-part information set feeds both services.

Delegated Regulation (EU) 2017/565 art. 54(1)

Investment firms shall not create any ambiguity or confusion about their responsibilities in the process when assessing the suitability of investment services or financial instruments in accordance with Article 25(2) of Directive 2014/65/EU. When undertaking the suitability assessment, the firm shall inform clients or potential clients, clearly and simply, that the reason for assessing suitability is to enable the firm to act in the client's best interest. Where investment advice or portfolio management services are provided in whole or in part through an automated or semi-automated system, the responsibility to undertake the suitability assessment shall lie with the investment firm providing the service and shall not be reduced by the use of an electronic system in making the personal recommendation or decision to trade.

What this means. The firm must tell the client, in clear and simple words, why it is asking for their information: to act in the client's best interest. If advice runs through an automated or semi-automated tool, the investment firm still holds full responsibility for the suitability check. Using software does not lower that duty. This closes an obvious gap: a firm cannot point to a robo-adviser algorithm as the reason a recommendation was unsuitable. The firm that deploys the tool carries the same duty as a firm that uses a human adviser.

United States

US — Suitability

Source: FINRA Rule 2111.

FINRA Rule 2111(a)

Verbatim clause withheld — the publishing authority's reuse terms do not confirm a right to redistribute the exact text (see sourcebooks/NOTICE-SOURCEBOOKS.md). See the URL above for the original, and "What this means" below for Doshi's own paraphrase.

What this means. FINRA Rule 2111 sets the core suitability duty for a broker-dealer. A firm must check a customer's investment profile first. The profile covers age, income, other holdings, goals, time horizon, and risk tolerance. Only after this check can the firm form a reasonable basis to recommend a trade. The list of profile factors is not exhaustive — the rule adds "any other information the customer may disclose", so a firm that learns something relevant outside the standard list must still weigh it.

FINRA Rule 2111, Supp. Material .05

Verbatim clause withheld — the publishing authority's reuse terms do not confirm a right to redistribute the exact text (see sourcebooks/NOTICE-SOURCEBOOKS.md). See the URL above for the original, and "What this means" below for Doshi's own paraphrase.

What this means. The rule splits suitability into 3 tests. Reasonable-basis suitability checks that the trade suits some investors at all. Customer-specific suitability checks that the trade suits this customer. Quantitative suitability checks that a string of trades, taken together, is not excessive for the customer even if each trade passes alone. Quantitative suitability is the test that catches churning: a broker who recommends 20 individually reasonable trades in a month can still fail this test if the combined cost and turnover is excessive for that customer.

Australia

Australia — Suitability

Source: ASIC RG 175 (advice conduct and disclosure), quoting Corporations Act 2001 s. 961B.

RG 175.162 — the best interests duty (s. 961B(1))

When providing personal advice to a client, an advice provider must act in the best interests of the client in relation to that advice: see s961B(1). We refer to this as the 'best interests duty'.

What this means. An advice provider must act in the best interests of the client when the provider gives personal advice. This is the core suitability duty in Australian law. The duty attaches to personal advice, not general advice — an adviser who gives only general advice does not owe this duty for that advice. See sourcebooks/advice_boundary/au.md for how ASIC draws that line.

RG 175.177–178 — the safe harbour (s. 961B(2))

Section 961B(2) sets out a 'safe harbour' for complying with the best interests duty in s961B(1)... Showing that all of the elements in s961B(2) have been met is one way for an advice provider to satisfy the duty in s961B(1). However, it is not the only way.

What this means. The law gives advisers a checklist to follow. If an adviser completes each step on the list, the adviser has one clear way to show the best interests duty is met. The list is not the only way to meet the duty, but it is the safest path. An adviser who skips the safe harbour checklist has not automatically failed the best interests duty — but that adviser then has to prove compliance some other way, with no ready-made evidence trail. Most advisers follow the checklist for exactly this reason.