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EFAMA response to ESMA’S consultation paper “guidelines on certain aspects of the Mifid II Suitability Requirements”

Distribution & Client Disclosures
27 April 2022 | Policy Position
Distribution & Client Disclosures

EFAMA places huge importance on this revision of ESMA’s suitability guidelines, as they spell out in detail how investors can invest in sustainable investment products. If they are well designed, the guidelines have the potential to significantly boost capital flows towards sustainable investments; a goal that the European fund industry strongly supports. On the contrary, if they were poorly developed, the guidelines may lead to an additional, lengthy tick-the-box exercise (on top of an already extensive suitability process) which could result in no sustainable investment products being ultimately recommended, as they do not fully match all of the client’s request.


When the European Commission published the revision to the MiFID II Delegated Regulation, it emphasised that the introduction of sustainability preferences into the advice process is meant to start a dialogue with investors on sustainable finance. Unfortunately, we doubt the current ESMA draft guidelines provide enough flexibility for this crucial back-and-forth conversation between investment firms and investors, as ESMA states that “adapt[ing] the sustainability preferences […] should not be the standard procedure”. When the revision enters into force on 02 August, however, there will be a stark mismatch between high clients’ expectations regarding sustainable finance and the availability of such products. This situation will gradually improve over time when more sustainable finance products will come to the market. However, in the early days, it will be commonplace that no sustainable finance products will fully match a client’s originally stated preferences. More flexibility should therefore be introduced in the final ESMA guidelines ensuring that investment firms can use “plain language” when discussing sustainable finance (rather than the legal concepts) and are allowed to explain why certain expectations cannot be met and suggest “best matching” alternatives instead. This will ensure that clients can make an informed investment decision. This additional flexibility can be achieved in various ways, as detailed in our response to Q3. Our proposals aim at ensuring that product manufacturers are incentivised to continuously their range of products “aligned” with the EU sustainable finance framework while avoiding that investors be forced to wait until the “perfect” product is available before starting to invest in sustainable finance.


We believe that further flexibility in other areas will also substantially improve the final guidelines:


  1. While generally aimed at retail investors, the final guidelines should more thoroughly distinguish between retail and professional investors. While retail investors will need more advice and explanations, professional investors typically have sufficient knowledge and experience regarding sustainable investments, thus shortening the suitability processes considerably.
  2. More emphasis should be put on the outcome of the client exploration process rather than the questions and their sequencing. While the draft guidelines are helpful in sometimes providing examples, it should be clear that the final guidelines are outcome and not processed-focused.
  3. While acknowledging that this is not under the sole control of ESMA, the misaligned timing of the different pieces of the EU’s sustainable finance framework has been most unhelpful to the financial industry in implementing the new requirements. We understand that ESMA will not publish the final guidelines before 02 August 2022. Ideally, they would have been made available sufficiently in advance to ensure that investment firms are given enough time to implement the detailed rules.
  4. Lastly, relevant data from SFDR, Taxonomy and upcoming CSRD will only become available throughout 2023 and 2025, while product manufacturers already required to advise on these products (and product features) from 02 August 2022. In addition, the complementing revision of ESMA’s “product governance” guidelines, defining the ESG target market data, is still missing, even though advisers build their suitability assessments on this data being provided by product manufacturers. While the fund industry (and other market participants) is doing its best efforts to work with these issues, we advocate for a pragmatic approach to supervisory enforcement of compliance, granting sufficient time (of at least one year) for the new requirements to be properly incorporated.
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