Firms (that are inter alia investment firms and credit institutions) (i) providing investment advice or portfolio management or (ii) selling or advising clients in relation to structured deposits have to provide suitable personal recommendations to their clients, in particular to their retail clients, or they have to make suitable investment decisions on behalf of their clients.
In order to match clients with suitable investments, Firms should establish policies and procedures to ensure that they consistently take into account: (i) all available information about the client necessary to assess whether an investment is suitable (ii) all material characteristics of the investments considered in the suitability assessment, including all relevant risks and any direct or indirect costs to the client. Sustainability preferences should only be addressed once the suitability has been assessed in accordance with the criteria of knowledge and experience, financial situation and other investment objectives. Afterwards, an investment strategy which fulfills the client’s sustainability preferences should be identified.
As far as clients are concerned, Firms inform their clients clearly and simply about the suitability assessment including (i) the terms and concept of environmental, social and governance aspects of sustainability (“ESG”) and (ii) the different elements of the definition of sustainability preference.
Firms must know the essential facts and characteristics of their clients as provided for in their adequate policies and procedures. Thus, they collect information about their clients, including their sustainability preferences, on any of its aspects (environmental, social or governance) or on a combination of these aspects, in accordance with the approach described in the Guidelines and they update such information on a regular basis. Firms are subject to the same obligations when providing portfolio management or investment advice with a portfolio approach.
Firms also put in place policies and instructions for their client-facing staff or when providing robo-advice services.
As far as products are concerned, Firms must understand the characteristics, nature, and features (including costs and risks) of investment products, as provided for in their policies and procedures, to recommend suitable investments or to invest into suitable products on behalf of their clients Firms could, for example, rank and group the financial instruments into the range of products they offer in terms of (i) the proportion invested in economic activities that qualify as environmentally sustainable; (ii) the proportion of sustainable investments; (iii) the consideration of principal adverse impacts and other ESG sustainability features.
Concerning their staff, Firms are required to ensure that their staff have an adequate level of skills, knowledge and expertise, inter alia on the criteria of the sustainability preferences and, to that effect, Firms should give staff appropriate training.
Finally, Firms should at least maintain adequate recording and retention arrangements of the suitability assessment, including the collection of information from the client, any investment advice provided and all investments (and disinvestments) made following the suitability assessment made, and the related suitability reports provided to the client. When providing the investment service of investment advice or portfolio management, records include the situations where a client’s sustainability preference are adapted and a clear explanation of the reasons for such adaptation.
Other aspects of the suitability requirements are provided in the Guidelines in (i) Questions and Answers and (ii) Good and poor practices on (a) client profiling, (b) costs and benefits of switching investments and (c) indicators, monitoring and control functions.
The Guidelines replace the previous ones on the same topic, which are repealed.
The Guidelines will apply as from six months from the date of their publication on ESMA’s website in all EU official languages.
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