As part of its action plan on financing sustainable growth (see our previous publication, Sustainable finance: no longer a niche sector?) and following a consultation in May last year, the European Commission has published a draft Delegated Regulation to amend the MiFID II Organisational Requirements Regulation (Delegated Regulation 2017/565). The purpose of the Delegated Regulation is to ensure that firms providing financial advice and portfolio management take into account client sustainability preferences in the selection of financial products offered to relevant clients. While the existing MiFID II suitability assessment includes many factors, the non-financial objectives of a client, such as environment, social and governance (ESG) issues, are not usually considered. This new process, therefore, introduces an additional layer of complexity for firms.

Feedback from the Commission’s consultation indicated that some stakeholders are reluctant to change their relatively new MiFID II processes. Despite this, and following the international trend, the Commission is convinced of the urgency to move ahead with its sustainable finance agenda and is progressing with its proposals.

The Commission cannot officially adopt these draft rules until new disclosure provisions for sustainable investments and sustainability risks, which put in place an EU-wide definition for ESG considerations, are agreed at EU level. Once adopted by the Commission, the draft Delegated Regulation will enter into force 20 days after publication in the Official Journal of the EU, unless objection is raised by the European Parliament or the Council of the EU. Thereafter, there is a 12 month implementation period (although the explanatory memorandum refers to a conflicting 18 month implementation period).

Nevertheless, the Commission indicates that the publication of this draft Delegated Regulation should enable firms to prepare to take ESG considerations and preferences into account in the suitability assessments they undertake. It will be a relief to industry that the Delegated Regulation does not require existing suitability assessments to be revisited.