As discussed in our blog post from last summer, the ESMA was expected to update the Guidelines on Suitability in order to extend these guidelines for the sustainability preferences and to fill the gaps in the areas where shortcomings and points for improvement were found in their MiFID II Suitability Requirements survey.
The assessment of suitability is one of the most important requirements for investor protection in the MiFID II framework. The ESMA guidelines apply in relation to Article 25(2) of MiFID II and Articles 54 and 55 of MiFID II Delegated Regulation and apply to the provision of the following investment services by investment firms:
- investment advice
- portfolio management
This Consultation Paper builds on the text of the 2018 ESMA guidelines , which are now being reviewed, following the adoption by the European Commission of the changes to the MiFID II Delegated Regulation to integrate sustainability factors, risk and preferences into certain organisational requirements and operating conditions for investment firms. The amendments have been published in the Official Journal of the European Union on 2 August 2021 and will apply from 2 August 2022.
These guidelines address in general situations where services are provided to retail clients, and when services are provided to professional clients. ESMA expects these guidelines to promote greater convergence in the interpretation of, and supervisory approaches to, the MiFID II suitability requirements.
To help clients understand the concept of “sustainability preferences” and the choices to be made in this context, firms should explain:
- the term “sustainability”,
- the distinction between the different elements of the definition of sustainability preferences between the products with and without such sustainability features in a clear manner, avoiding technical language, and
- what environmental, social and governance aspects mean.
The information on the sustainability preferences of the client should include all aspects mentioned in the definition of “sustainability preferences” according to Article 2(7) of the MiFID II Delegated Regulation and should be sufficiently granular to allow for a matching of the client’s sustainability preferences with the sustainability-related features of financial instruments. Sustainability preferences are defined as a client preference for (A) a minimum proportion of EU Taxonomy aligned investments; (B) a minimum proportion of SFDR sustainable investments; or (C) consideration of principal adverse impacts on sustainability factors set out in the SFDR RTS (“PAIs”) on either a qualitative or quantitative basis, where the client able to specify the minimum proportions or qualitative / quantitative elements in each case.
ESMA suggests that firms should collect the following information from clients:
- Whether the client has any sustainability preferences (yes/no).
- Whether – and if so, to what extent - the client has sustainability preferences with regard to aspect A), B) or C) from the definition according to Article 2(7) MiFID II Delegated Regulation (see table above). In addition, if the client prefers this, a combination of one or more of the three aspects shall be considered (where relevant).
- For aspects A) and B), the minimum proportion.
- For aspect C), which principal adverse impacts (PAI) should be considered including quantitative and qualitative criteria demonstrating that consideration. Throughout the process, firms should adopt a neutral and unbiased approach as to not influence clients’ answers.
ESMA will consider the responses received to this consultation paper in Q2 2022 and expects to publish a final report, and final guidelines, in Q3 2022. Hence, it is possible that the final version of the guidelines may not be available for the due date of the “ESG Preferences” requirements in August 2022.
cleversoft's Suitability Service cleverMatch:
With the Suitability Service cleverMatch, we offer a flexible cloud service where you can process both individual and multiple product checks for suitability and equivalence. The checks cover:
- Target market
- Equivalent products
- Customer portfolio
We are already extending our cleverMatch service to cover sustainability preferences according to these updated requirements.
Our Regulatory Watch working group on MiFID II continues to closely monitor regulatory developments. Once the final report is published, we will do the necessary adjustments, if any.