The six Delegated Acts
The draft Delegated Acts do not create new requirements; rather they bolster the existing requirements explicitly to include and integrate sustainability risks, preferences and factors into firms’ procedures, policies and processes.
We set out below a brief summary of the key points.
MiFID II
There are two Delegated Acts relevant to MiFID II; one amends Delegated Regulation 2017/565 on organisational requirements and the other amends Delegated Directive 2017/593 on product governance.
Additional information to be provided to clients
The Delegated Acts amending MiFID II will require MiFID investment firms to obtain certain information from clients about their ESG investment preferences. Investment advice provided by investment firms to clients should reflect both the clients’ financial objectives and their ESG preferences.
In addition, investment firms will be required to provide certain information to clients about ESG factors. For example, an investment firm must provide a retail client a report explaining how the firm’s investment advice and recommendations are suitable for the retail client, including how the recommendation meets the client’s sustainability preferences.
Further, in addition to the existing requirements to provide a description of the factors taken into consideration in the selection process used by the investment firm when recommending financial instruments, any such description must include any sustainability factors considered. This will require investment firms to integrate clients’ sustainability preferences into the firms’ suitability assessments.
Organisational requirements
Investments firms will continue to be required to have in place adequate policies and procedures to ensure that they understand the nature, features, including costs and risks of investment services and financial instruments selected for their clients, including any sustainability factors.
Further, investment firms which manufacture or distribute financial products will be required to consider sustainability preferences as part of their product oversight and governance arrangements, including when assessing the potential target market for a financial instrument and determining whether that financial instrument meets the needs of the target market.
AIFMD and UCITS
The Delegated Acts amending the AIFMD Delegated Regulations and UCITS Delegated Directive, respectively, will impose similar requirements on alternative investment fund managers (AIFMs) and management companies.
Both types of manager will be required to take into account sustainability factors when complying with existing regulatory requirements, including due diligence and conflicts of interests. Further, both AIFMs and management companies will be required to ensure that they possess the necessary resources and expertise (e.g personnel) for the effective integration of sustainability risks.
The Delegated Acts state that senior management are to be made responsible for the integration of sustainability risks into relevant organisational matters, including required policies and procedures.
IDD and Solvency II
The Delegated Acts affecting the insurance sector amend Delegated Regulations 2017/2358 on product oversight and governance, 2017/2359 on information requirements and conduct of business rules, and 2015/35 on the taking-up and pursuit of the business of insurance and reinsurance.
As a result, insurers and insurance intermediaries will be required to assess the sustainability preferences of customers and potential customers and take their preferences into account when advising on, or selecting, any insurance-based investment products. Further, when distributing insurance-based investment products, insurers and insurance intermediaries will be required to consider any possible conflicts of interest that may arise as a result of such sustainability factors. This will mean considering the sustainability profile and preferences of the customers belonging to the target market for the product.
Separately, insurers and reinsurers will be expected to integrate the consideration of sustainability risks into their risk management policies, risk management function and risk-related calculations.
Conclusion
The consultation period for the Delegated Acts ends on 6 July 2020. If adopted by the European Commission, the Delegated Acts will be scrutinised by the European Parliament and Council before they are published in the Official Journal of the European Union. If adopted, the Delegated Acts are expected to take effect 12 months after their publication in the Official Journal.
Next steps
In addition to the legislative initiatives discussed above, the European Commission is planning to introduce standards and labels for green financial products. For example, the European Commission has proposed an initiative to establish a standard for green bonds so that bonds which meet certain requirements can be labelled ‘EU Green Bonds’. The European Commission is currently inviting feedback on the proposed initiative with the feedback period ending on 10 July 2020.
Client Alert 2020-402
