Investment Firms – Are you ready for MiFID Sustainability Deadlines?
Investment firms will be aware of upcoming deadlines of 2 August 2022 for integration of sustainability factors, risks and preferences into organisational requirements and 22 November 2022 for integration of sustainability factors into product governance obligations (“MiFID Sustainability Requirements”). UCITS management companies and AIFMs with MiFID ‘top-up’ permissions will also be subject to MiFID Sustainability Requirements.
In this briefing, we consider the MiFID Sustainability Requirements in more detail and outline practical steps investment firms can take now to prepare for compliance.
Organisational Requirements and Operating Conditions
Commission Delegated Regulation (EU) 2021/1253 (here) amends the MiFID Delegated Regulation1 to require investment firms providing investment advice and portfolio management to integrate sustainability factors, risks and preferences within organisational requirements and operating conditions.
The Delegated Regulation applies from 2 August 2022 and includes requirements to:
- take account of sustainability risks when complying with organisational requirements including those requirements related to decision-making procedures, internal control mechanisms and employing skilled personnel;
- establish, implement and maintain adequate risk management policies and procedures which take into account sustainability risks;
- take account of a client’s sustainability preferences when identifying conflicts of interest that arise in the course of providing investment and ancillary services;
- provide, where relevant, the sustainability factors taken into consideration in the selection process of products when providing investment advice; and
- incorporate sustainability preferences within suitability assessments and suitability reports. ESMA has produced draft Guidelines with further detail on how investment firms should achieve this. ‘Sustainability preferences’ are categorised by reference to SFDR2 and the Taxonomy Regulation3. The draft Guidelines have a particular focus on the importance of explaining these concepts in a clear manner, avoiding technical language and explaining what environmental, social and governance aspects mean to clients.
Product Governance Requirements
Commission Delegated Directive (EU) 2021/1269 (here) amends the MiFID II Delegated Directive4 and requires investment firms manufacturing and distributing financial instruments (in scope investment firms) to integrate sustainability factors into product governance obligations.
The Delegated Directive is required to be transposed into Irish law by 21 August 2022 with an application date of 22 November 2022. In scope investment firms will be required to consider sustainability factors in the product approval process of each product and in other governance and oversight arrangements for products intended for distribution to clients seeking products with a sustainability related profile. New requirements include:
- specifying as part of the target market assessment any sustainability related objectives with which the product is compatible;
- avoiding general statements that products have a sustainability related profile, instead in scope investment firms must specify which group of clients with sustainability related objectives the product is supposed to be distributed;
- where relevant, presenting sustainability factors of products in a transparent manner and providing distributers with the relevant information to consider any sustainability related objectives of the client; and
- reviewing products on a regular basis and assessing whether the product or service remains consistent with the needs, characteristics and objectives, including any sustainability related objectives, of the identified target market and whether the intended distribution strategy remains appropriate.
On 8 July 2022, ESMA issued a consultation on draft Guidelines on MiFID II product governance requirements which includes proposals on how investment firms may specify any sustainability related objectives with which a product is compatible. This consultation closes on 7 October 2022 and ESMA expects to publish a final report in Q1 2023.
What Practical Steps can Investment Firms take now?
In preparing for compliance with MiFID Sustainability Requirements, investment firms should keep in mind the contents of the Central Bank of Ireland (the “CBI”) ‘Dear CEO’ letter of November 2021 (further detailed in our briefing here). In this letter, the CBI stated that it expects boards and senior management of firms to be proactive in taking action to promote a culture that places emphasis on climate and broader ESG issues.
Practical steps investment firms can take now to facilitate compliance with MiFID Sustainability Requirements are:
- ensuring sustainability is documented at all levels of the organisation, ie, on board/ committee agendas and within policies and procedures;
- obtaining underlying product information to facilitate compliance;
- reviewing and updating questionnaires, models and IT systems used for client suitability assessments; and
- putting in place appropriate training for board members and staff.
- Delegated Regulation No 2017/565
- Regulation No 2019/2088
- Regulation No 2020/852
- Commission Delegated Directive (EU) 2017/593
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
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