MiFID II Suitability Assessment for Investment Advice and Portfolio Management, Including Automated and Semi-Automated Systems (Article 25(2) and Delegated Regulation 2017/565 Article 54)

Directive 2014/65/EU, Article 25(2), supplemented by Commission Delegated Regulation (EU) 2017/565, Article 54

In force since 3 Jan 2018.

An AI sector rules rule binding public and private bodies.

Obligation class: Disclosure, Governance
Audit expectation: periodic
Who audits it: Self

As of 10 October 2026.

What it requires

This Directive is addressed to the Member States (Article 97), which had to adopt and publish the measures necessary to comply with it by 3 July 2017 and apply them from 3 January 2018 (Article 93(1), as amended by Directive (EU) 2016/1034, Article 1, point (7)), so an investment firm meets Article 25(2) through each Member State's national law; Delegated Regulation (EU) 2017/565 is binding in its entirety and directly applicable in all Member States and applies from the date that appears first in the second subparagraph of Article 93(1) of the Directive, which is 3 January 2018 (Article 91), and Delegated Regulation (EU) 2021/1253 changed its Article 54 with effect from 2 August 2022 (Article 2).
It reaches you if you are an investment firm, meaning a legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis (Directive 2014/65/EU, Article 4(1), point (1)), that provides investment advice or portfolio management: 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, financial situation including the ability to bear losses, and investment objectives including risk tolerance, so as to recommend the investment services and financial instruments that are suitable for the client and in particular are in accordance with the client's risk tolerance and ability to bear losses (Article 25(2)).
Where you provide investment advice or portfolio management services in whole or in part through an automated or semi-automated system, keep the responsibility to undertake the suitability assessment with yourself as the investment firm providing the service; the use of an electronic system in making the personal recommendation or decision to trade does not reduce it (Delegated Regulation (EU) 2017/565, Article 54(1)).
Do not create any ambiguity or confusion about your responsibilities in the process when assessing suitability, and inform clients or potential clients, clearly and simply, that the reason for assessing suitability is to enable you to act in the client's best interest (Article 54(1)).
Obtain from clients or potential clients such information as is necessary to understand the essential facts about the client and to have a reasonable basis for determining that the specific transaction to be recommended, or entered into in the course of providing a portfolio management service, meets the client's investment objectives, including risk tolerance and any sustainability preferences, is one the client is able financially to bear, and is one for which the client has the necessary experience and knowledge to understand the risks involved (Article 54(2), point (a) as replaced by Delegated Regulation (EU) 2021/1253, and points (b) and (c)).
Take reasonable steps to ensure that the information collected about your clients is reliable, including by ensuring that all tools, such as risk assessment profiling tools or tools to assess a client's knowledge and experience, are fit-for-purpose and appropriately designed for use with your clients, with any limitations identified and actively mitigated through the suitability assessment process (Article 54(7), point (b)).
Do not recommend investment services or financial instruments to a client or potential client if you do not obtain the information required under Article 25(2) of the Directive (Article 54(8)), and do not recommend or decide to trade where none of the services or instruments are suitable for the client (Article 54(10), as replaced by Delegated Regulation (EU) 2021/1253).
Have in place, and be able to demonstrate that you have in place, adequate policies and procedures to ensure that you understand the nature and features, including costs and risks, of the investment services and financial instruments selected for your clients, including any sustainability factors, and assess, taking into account cost and complexity, whether equivalent investment services or financial instruments can meet the client's profile (Article 54(9), as replaced by Delegated Regulation (EU) 2021/1253).
Where you do not recommend a financial instrument as meeting a client's or potential client's sustainability preferences because it does not meet them, explain the reasons to the client or potential client and keep records of those reasons (Article 54(10), as replaced by Delegated Regulation (EU) 2021/1253).
When providing investment advice, provide the client, before the transaction is made, with a statement on suitability in a durable medium specifying the advice given and how that advice meets the preferences, objectives and other characteristics of the retail client (Directive 2014/65/EU, Article 25(6)).
When providing investment advice, provide a report to the retail client that includes an outline of the advice given and that explains how the recommendation provided is suitable for the retail client, including how it meets the client's investment objectives, personal circumstances with reference to the investment term required, knowledge and experience, attitude to risk, capacity to sustain losses and sustainability preferences (Delegated Regulation (EU) 2017/565, Article 54(12), as replaced by Delegated Regulation (EU) 2021/1253).
If you provide a periodic suitability assessment, review the suitability of the recommendations you give at least annually (Delegated Regulation (EU) 2017/565, Article 54(13)).
When providing investment advice or portfolio management that involves the switching of financial instruments, obtain the necessary information on the client's investment and analyze the costs and benefits of the switching, and when providing investment advice inform the client whether or not the benefits of the switching are greater than the costs involved (Directive 2014/65/EU, Article 25(2), third subparagraph, added by Directive (EU) 2021/338, which Member States apply from 28 February 2022).

Who enforces it

Enforcement body

The competent authorities that each Member State designates under Article 67(1) of Directive 2014/65/EU to carry out the duties provided for under the Directive and Regulation (EU) No 600/2014.

What this law does

Drafted with AI

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Research summary

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Article 25(2) of Directive 2014/65/EU requires an investment firm that provides investment advice or portfolio management to 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, financial situation including the ability to bear losses, and investment objectives including risk tolerance, so as to enable the firm to recommend the investment services and financial instruments that are suitable for the client.

Article 25(2), third subparagraph, as added by Directive (EU) 2021/338, requires an investment firm that provides investment advice or portfolio management involving the switching of financial instruments to obtain the necessary information on the client's investment and to analyze the costs and benefits of the switching, and, when providing investment advice, to inform the client whether or not the benefits of the switching are greater than the costs.

Article 4(1) of Directive (EU) 2021/338 requires Member States to adopt and publish the measures necessary to comply with it by 28 November 2021 and to apply them from 28 February 2022. Article 25(6) requires an investment firm that provides investment advice, before the transaction is made, to provide the client with a statement on suitability in a durable medium specifying the advice given and how that advice meets the preferences, objectives and other characteristics of the retail client.

Article 54(1) of Delegated Regulation (EU) 2017/565 provides that 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 lies with the investment firm providing the service and is not reduced by the use of an electronic system in making the personal recommendation or decision to trade.

Article 54(1) also requires the firm not to create any ambiguity or confusion about its responsibilities in the process when assessing suitability, and to 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.

Article 54(2) requires the firm to obtain from clients or potential clients such information as is necessary for the firm to understand the essential facts about the client and to have a reasonable basis for determining that the specific transaction to be recommended, or entered into in the course of providing a portfolio management service, satisfies the criteria the paragraph lists.

Delegated Regulation (EU) 2021/1253 replaced point (a) of Article 54(2) so that the first criterion is that the transaction meets the investment objectives of the client in question, including the client's risk tolerance and any sustainability preferences. Article 2 of Delegated Regulation (EU) 2021/1253 provides that it applies from 2 August 2022.

Article 54(7), point (b), requires the firm to take reasonable steps to ensure that the information collected about its clients is reliable, including by ensuring that all tools, such as risk assessment profiling tools or tools to assess a client's knowledge and experience, employed in the suitability assessment process are fit-for-purpose and appropriately designed for use with its clients, with any limitations identified and actively mitigated through the suitability assessment process.

Article 54(8) provides that where the firm does not obtain the information required under Article 25(2) of the Directive, it shall not recommend investment services or financial instruments to the client or potential client.

Article 54(10), as replaced by Delegated Regulation (EU) 2021/1253, provides that the firm shall not recommend or decide to trade where none of the services or instruments are suitable for the client, and that it shall explain to the client the reasons for not recommending an instrument as meeting the client's sustainability preferences when it does not meet them, and keep records of those reasons.

Article 54(12), as replaced by Delegated Regulation (EU) 2021/1253, requires the firm, when providing investment advice, to provide a report to the retail client that includes an outline of the advice given and that explains how the recommendation provided is suitable for the retail client, including how it meets the client's investment objectives, personal circumstances with reference to the investment term required, knowledge and experience, attitude to risk, capacity to sustain losses and sustainability preferences.

Article 54(13) requires an investment firm providing a periodic suitability assessment to review the suitability of the recommendations given at least annually. The only duties to explain in these provisions run to the client and concern why a recommendation is suitable, and Article 54 contains no provision requiring a firm to explain how an automated or semi-automated system reached a recommendation.

Article 91 of Delegated Regulation (EU) 2017/565 provides that it applies from the date that appears first in the second subparagraph of Article 93(1) of Directive 2014/65/EU and is binding in its entirety and directly applicable in all Member States.

Article 1, point (7), of Directive (EU) 2016/1034 replaces in Article 93(1) of Directive 2014/65/EU the date for adopting and publishing the transposing measures, 3 July 2016, with 3 July 2017, and the date for applying them, 3 January 2017, with 3 January 2018. Article 70(3), point (a), of Directive 2014/65/EU lists Article 25(1) to (6) among the provisions an infringement of which Member States shall regard at least as an infringement of the Directive.

Article 70(1) requires Member States to lay down rules on, and ensure that their competent authorities may impose, administrative sanctions and measures applicable to all infringements of the Directive.

Article 70(6) requires Member States to give competent authorities the power to impose at least maximum administrative fines of at least EUR 5,000,000 on a legal person, or of up to 10% of its total annual turnover, of at least EUR 5,000,000 on a natural person, and of at least twice the amount of the benefit derived from the infringement where that benefit can be determined, so the amounts are floors for the maximum fines that Member States must make available and not fines that the Directive imposes on a firm directly.

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