Ever since the financial crisis, acquiring the specialist knowledge required to keep pace with MiFID II has kept everyone busy. Anyone working as an investment adviser is under constant pressure to update their skillset. They need to know which products are most suitable for their clients, whether they can recommend these products to clients regardless of stage or status, and which benchmarks to apply before giving advice.
As of 2022, they must also verify the client’s sustainability preferences. Until now, their suitability reports were required to state whether and if so, why the financial instrument to be invested in was the right one. This has now been supplemented by the sustainability criterion: prospective investors must provide detailed information on their investment’s sustainability goals and which specific areas to prioritise.
So advisers must now offer and recommend financial products that match the prospective investor’s personal sustainability preferences. This is challenging, because definitions of sustainability in relation to complex environmental, social and governance (ESG) areas are very broad. In addition, they include a graduated scale for companies that are only involved in a minimum of sustainable economic activity as defined by the Taxonomy Regulation. The most challenging requirements are those pertaining to activities where the investment could have a significant impact on the entity’s sustainability-related activities.
Anybody who has already been applying MiFID II regulations must now add the new provisions to them and apply them to all future activities. This includes all personnel providing investment advice in banks or insurance companies, independent financial advisers and market makers, as well as specialist services involved in, for example, investment research. It will be interesting to see at what point banks address this issue over the next 12 months. To date, feedback from many financial institutions has been low-key – perhaps in the hope that any innovations and changes will be relatively limited in scope. Many of them will experience déjà vu as they remember the introduction of the modified MiFID framework back in 2010. Even so, they were – and will be – obliged to take these and all other legal provisions rolled out over the last few years very seriously, and implement them with all due care. The key priorities: to prepare in good time, and to establish appropriate systems in good time. Sustainability is no longer just a selling point – it requires a change in mindset with much more significant implications than anything in MiFID II.
Financial institutions must already navigate through a profusion of regulations – a veritable thicket of legalese. Here, the Sustainable Finance Disclosure Regulation (SFDR) is especially important, in that it imposes new transparency requirements on investment advisers. They are now required to show which sustainability risks they have considered or included in their investment processes to date – both positive and negative. The Taxonomy Regulation, on the other hand, sets out criteria for the extent to which an economic activity can be regarded as ecologically sustainable at all. What contribution does the company’s business activity make to achieving environmental objectives? These criteria should be applied when determining the relative sustainability of each customer’s financial investment. As part of the MiFID II legislative framework, all these regulations are interrelated and cross-referenced, providing a guideline for sustainable action by investment advisers.
Indeed, all those involved must now take action. For anyone working in the financial sector, this means delving into every aspect of the sustainability provisions in greater detail than ever before, as well as taking appropriate training courses to acquire the skills necessary to proficiently cover this area in assessments and reports. It affects every bank department, from investment advice and financial planning through to supervision, compliance and controlling, not to mention corporate banking and payment transactions.