04 May 2022

SMSG advice to the ESMA Consultation Paper on Guidelines on certain aspects of the MiFID II suitability requirements.

Securities and Markets Stakeholder Group

I. Executive summary
 ...There is a risk of misalignment of expectations of clients on the one hand and availability of products on the other hand. Also, the philosophy of confronting the client with a high number of indicators shifts the burden of interpretation towards the investor.

Due to the highly quantitative approach, there is a risk that the potential role of engagement is disregarded and that the focus is on mere exclusion criteria and minimum proportions, while other approaches also have their merit.

For all these reasons, and assuming that this legislation will be on a learning path for a considerable period of time, the SMSG suggests that ESMA organizes an early Call for Evidence on how sustainability preferences are assessed and on possible alternative approaches. In this evaluation, it is important to place the “average“retail investor in the centre. Evidence of behavioral finance is in this case useful. To allow an integrated approach between different sets of legislation, the timing of this Call for Evidence is to be aligned with the scheduled review of the Sustainable Finance Disclosure Regulation. The SMSG also calls for a regular feedback process between financial markets participants, stakeholders in the wider sense, regulators and legislators.

While the SMSG agrees that green-washing should be avoided, it points at a possible reverse problem:
green-bleaching, meaning fund managers that invest into sustainable activities but refrain from claiming so to avoid the data problems arising from the disclosure obligations. If green-bleaching is a more pervasive trend than anecdotical evidence indicates, that would make the current legislation partly irrelevant. Hence, the SMSG suggests that ESMA tries to collect, as part of the evaluation, information on this. This “green-bleaching” may also be implicitly reflected in the viewpoints taken by the ESA’s. For example, the ESAs suggest avoiding using estimates for taxonomy-aligned figures while rejecting the use of a disclaimer only (and asking for a hard figure, be it “0”). However, the real alignment is not “0”.
While the level 1 legislation is outside the competence of ESMA and national regulators, regulators could, as neutral parties, prepare background information for media and the general public, in which the problem of data scarcity is highlighted, alongside general information (on what is to be understood by sustainability preferences, options a-c...)...

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