The European Securities and Markets Authority (ESMA) is consulting on some aspects of investment suitability requirements under the Markets in Financial Instruments Directive (MiFID II). The regulator is doing consultation in order to update its guidelines with regards to how companies comply with investment suitability requirements.
The assessment launched by ESMA is important as it aims to determine whether authorized companies are taking all reasonable steps to ensure that clients’ investments align with their personal preferences and investment objectives. The regulator is conducting such consultation to determine whether suitability steps are in place to ensure investments do not expose clients to the risks of buying products and services that do not align with their needs.
The assessment of investment suitability is vital protection for investors under the Markets in Financial Instruments Directive (MiFID II). Such assessment also applies to all regulations of all types of investment advice and portfolio management.
ESMA has been reviewing major amendments recently introduced under the MIFID II . Such amendments include the following:
- Companies are expected to collect information from clients on their investment preferences and to what extent customers want to invest in such products.
- Once companies have identified various suitable products for clients, they are expected to identify products that fulfil the client’s sustainability preferences.
- Firms are also required to give their employees appropriate training on sustainability topics and keep appropriate records of the sustainability preferences of customers and any updates of such preferences.
ESMA’s consultation comes to an end in April this year. The regulator will consider the feedback it gets and plans to conduct another consultation session in Q2 of 2022. Additionally, it finally expects to publish a final report in Q3 of 2022.
Efforts towards Creation of a Sustainable Financial System
The announcement by ESMA comes at a time when securities regulators work to protect investors, maintain fair efficient and transparent markets, and reduce systemic risk. Sustainability matters can raise important challenges in meeting such core objectives.
Market events that happened in 2020 and ongoing concerns about stability in the capital markets are influencing regulators to reexamine risks and redefine resilience. Appropriate investor protection and good governance remain regulatory necessities and are being reinforced and re-standardized.
