The MiFID II appropriateness test and execution-only

The MiFID II appropriateness test checks whether a client has the knowledge and experience to understand the risks of a product or service when the firm is not giving advice. If the firm concludes the product is not appropriate, or the client won’t provide enough information, the firm must warn the client. The rules are in Article 25(3) and (4) of MiFID II and Articles 55 and 56 of Delegated Regulation (EU) 2017/565. ESMA’s guidelines on appropriateness and execution-only (ESMA35-43-2938) have applied since 12 October 2022.

Where appropriateness fits

MiFID II scales investor protection to the service:

How the appropriateness test works

1. Collect knowledge and experience

Article 55 lists what the firm needs to know about the client, as relevant to the specific product or service:

• the types of service, transaction and financial instrument the client is familiar with;
• the nature, volume and frequency of their past transactions, and the period over which they were carried out;
• their level of education and their profession, or relevant former profession.

The firm must not discourage clients from providing the information. It may rely on what the client says unless it is manifestly out of date, inaccurate or incomplete.

2. Assess and match

The firm determines whether the client understands the risks of the specific product or service. It may assume that a professional client has the necessary knowledge and experience for the products and services for which they are classified as professional (Article 56).

3. Warn where needed

There are two kinds of warning:

• Not appropriate. The firm considers the product or service is not appropriate for the client.
• Cannot assess. The client has chosen not to provide the information, or has provided too little.

Warnings may be given in a standardised format. ESMA expects them to be effective. A warning should be clear and prominent, should not be buried among other information, and should be given before the client places the order.

The execution-only exemption

Under Article 25(4), a firm can execute or transmit orders without an appropriateness assessment if all of these conditions are met:

1. The service relates to non-complex instruments. Typical examples are shares admitted to trading on a regulated or equivalent market (excluding shares in non-UCITS funds and shares that embed a derivative), plain bonds and money market instruments, UCITS units (excluding structured UCITS) and simple structured deposits.
2. The service is provided at the client’s initiative.
3. The client has been clearly informed that the firm is not required to assess appropriateness and that they therefore don’t benefit from that protection. The warning may be in a standardised format.
4. The firm complies with its conflicts of interest obligations.

What ESMA’s guidelines emphasise

• Tell clients what the test is for, so they understand why answering accurately matters.
• Avoid self-assessment. Use questions that test understanding of the product’s risks, not “Do you understand derivatives?”
• Design questions that don’t lead. Avoid pre-ticked answers, and don’t reveal the “right” answer in the wording.
• Limit trial and error. Have controls when clients change answers in quick succession to get through.
• Understand the product. Classify each product’s complexity and the knowledge it requires.
• Keep records and run controls. Record assessments, warnings and decisions, and monitor the process.

What to record

Article 56(2) requires firms to keep records of:

• the result of each appropriateness assessment;
• any warning given where the product or service was assessed as not appropriate, whether the client asked to proceed anyway, and whether the firm accepted that request;
• any warning given where the client did not provide enough information, and whether the client asked to proceed anyway, and whether the firm accepted that request.

These records form part of a firm’s wider MiFID II record-keeping.

How Tervan handles appropriateness

Tervan runs appropriateness checks as their own question sets, alongside the suitability flow. Warnings are shown in your interface, and the client must acknowledge them before continuing. Each result, warning and decision is written to the same audit trail as the rest of the advice process, with the exact wording the client saw.

Frequently asked questions

What is the difference between suitability and appropriateness?

Suitability applies to investment advice and portfolio management. It looks at the client's knowledge and experience, financial situation and objectives. Appropriateness applies to other services, such as order execution, and only looks at whether the client has the knowledge and experience to understand the risks of the product or service.

Can a client proceed if the product is not appropriate?

MiFID II requires the firm to warn the client, but does not prohibit the transaction. ESMA expects firms to have a policy on whether and when to accept a client’s decision to proceed, and to record the warning and the client’s decision.

What is execution-only under MiFID II?

An exemption from the appropriateness test for services that only involve executing or transmitting client orders in non-complex instruments, at the client’s initiative, where the client is told the firm will not assess appropriateness and the firm manages conflicts of interest.

Which instruments are non-complex?

Typically shares admitted to trading on a regulated or equivalent market, plain bonds and money market instruments, UCITS units other than structured UCITS, and simple structured deposits. Instruments that embed a derivative or have a structure that makes the risk hard to understand are complex.

This guide is general information about EU rules, not legal advice. National implementation and your regulator's guidance can add requirements. Check the primary sources linked above before relying on it.