European Securities and Markets Authority (ESMA) published first set of guidelines on certain aspects of MiFID suitability requirements
The recent amendments to the MiFID II Delegated Regulation seek to integrate sustainability preferences in advisory and portfolio management processes to ensure that investment firms take such preferences into account. Accordingly, when performing suitability assessments, firms are required to assess client’s sustainability preferences.
In light of this, on 27 January 2022, ESMA issued a Consultation Paper - ‘Guidelines on certain aspects of the MiFID II Suitability Requirements’ (the ‘Proposed Guidelines’) which are directed to:
In terms of such Consultation Paper, ESMA has proposed some amendments to the existing 2018 guidelines in order to reflect the changes made to the MiFID II Delegated Regulation as aforementioned.
| To clarify the application of certain aspects of the MiFID II suitability requirements in order to ensure the common, uniform and consistent application of: | |||
| Application | Article 25(2) of MiFID II - Assessment of suitability and appropriateness and reporting to clients | Article 54 of the MiFID II Delegated Regulation - Assessment of suitability and suitability reports | Article 55 of the MiFID II Delegated Regulation - Provisions common to the assessment of suitability or appropriateness |
| To ensure the common, uniform, and consistent implementation of the MiFID II requirements to: | |||
| Implementation | - integrate client’s preferences in terms of sustainability as a top up to the suitability assessment | - integrate sustainability risks into the organisational requirements | |
In respect of sustainability, the salient amendments introduced to the Delegated Regulation and reflected in ESMA’s Proposed Guidelines are:
Collection of information from clients on sustainability preferences
As part of the suitability assessment, firms are required to collect information from clients or potential clients on their preferences in relation to the different types of sustainable investment products and to what extent they want to invest in these products.
Assessment of sustainability preferences
When a firm identifies a range of suitable products for a client in line with the requirements of knowledge, experience, financial situation and other investment objectives, it should as a second step, identify the products that fulfill the client’s sustainability preferences.
Organisational requirements
Firms should provide staff with appropriate training on sustainability topics and keep appropriate records of the sustainability preferences of the client (if any) and any updates of these preferences.
Although presently the availability of financial instruments with sustainability features may be limited and the introduction of such financial instruments in the firm’s product scope might be gradual, ESMA nonetheless urges firms (a message that is reiterated by the MFSA):
to collect all information concerning a client’s sustainability preferences;
If this is the case, to clearly indicate that there are currently no products available that would meet those preferences and therefore to give the client the possibility to adapt the sustainability preferences; and
to document (a) and (b) in the suitability report.
Indeed, ESMA believes that the eventual adoption of the Proposed Guidelines should mitigate the risks of divergent interpretations that might lead to discrepancies in the application and supervision of the relevant regulation and requirements across Member States.
Following the consultation process, ESMA will consider the feedback it receives in Q2 of 2022 and expects to publish a final report in Q3 2022. The Proposed Guidelines should apply as from two months from the date of publication of the same on ESMA’s website in all EU official languages at which point the earlier version of the ESMA guidelines should cease to apply.
Interestingly, EFAMA (European Fund and Asset Management Association) published feedback to this Consultation on 27 April 2022. It made various proposals aimed at encouraging more flexibility to be introduced in the final ESMA guidelines to allow more room for dialogue between investment firms and investors, ensuring that investment firms can use plain language when discussing sustainable finance and allowing firms to explain why certain expectations cannot be met and suggesting best matching alternatives instead.
