Four Steps to MiFID II Compliance
A simple MiFID II solution
Financial advisers are now held accountable for their clients’ sustainability preferences, on top of clients’ overall risk profile, currently collected through the suitability assessment.
This new addition is applicable from August 2 and it seeks to align the Markets in Financial Instruments Directive (MiFID II) with the EU Sustainable Finance Regulation, created to bring more transparency and accountability to financial markets.
What has changed?
Until recently, investment firms were required to match financial products to clients’ preferences, taking into consideration:
- that the product risk/ reward profile is consistent with clients’ risk aversion profile,
- that the product has been designed to benefit the client.
From August 2, a third element came into play, as financial advisers are required to match financial instruments’ sustainability factors to clients’ preferences.
The new extension to MiFID II also highlights the need for more transparent information on the sustainable characteristics of products, as seen in the amendment of Article 9, which has added the following:
“The sustainability factors of the financial instrument shall be presented in a transparent manner and provide distributors with the relevant information to duly consider any sustainability-related objectives of the client or potential client.”
This speaks directly to other EU regulations like SFDR and the EU Taxonomy, which are already setting a common language for sustainable financial products marketed in the European Union.
The concept of accountability and higher transparency is further developed in article 10, under the title “Product governance obligations for distributors.” Until now, investment firms were required to put in place mechanisms to ensure that both the financial products and the distribution strategy were aligned with clients’ needs. From now on, they also need to make sure they have the right amount of information with the highest accuracy on the sustainability traits of the products, provided by product manufacturers.
What is required?
Simply put, “sustainability factors” are now part of the existing MiFID II requirements. In other words, financial advisers and portfolio managers trading in the European Union are required to ask their clients about their sustainability investment preferences and build a product offering accordingly.
In practice, this means:
- Creating a framework to assess clients’ sustainability preferences and adding it to the existing questionnaire. This new amendment of MiFID II is client-centric, so it attempts at reducing complexity when possible.
- Integrating this framework into the existing process of matching products.
- Accessing the data to match the product offering with clients’ profiles. For this step, distributors will need product information aligned with main sustainability EU regulations such as SFDR and the EU Taxonomy. The most widely accepted standard to exchange this information is the European ESG Template (EET), an up-to-date template that helps product manufacturers disclose everything required by the current regulation. The EET interacts with the EMT, the European MiFID template already in use.
- Auditing numbers to avoid any greenwashing attempt. Even if companies or product manufacturers are disclosing the data, it is best practice to look at alternative sources of data to validate those numbers and be confident in the products offered. The AI-based models and technology used by Clarity AI increase the reliability and accuracy of the data, at scale.