Europe’s ESG in MiFID proposal would create “massive” extra burden for banks – consultation

The draft legislation to get environmental, social and governance (ESG) considerations into the MiFID rules that govern investment intermediaries has already run into strong opposition from industry groups representing banks and financial advisors.

The proposals are part of the wider EU Action Plan on Sustainable Finance released last month — but Austrian economic chamber the WKO says that as drafted it would lead to an “additional, massive organizational and administrative effort for banks” offering financial advice.

Pointing out that the new MiFID II regime only came into force in January this year, the WKO’s banking and insurance arm said the draft would mean that “every single client” would have to be asked about their ESG preferences – leading to a “significant bureaucratic burden”. MiFID refers to the Markets in Financial Instruments Directive.

The submission continues: “We generally reject the legal obligation envisaged in Article 1 to request the customer’s ESG preferences during a consultation meeting.” A legal provision to ask each customer about ESG “seems excessive”.

The WKO argues that the existing legal obligation to offer suitable products (the ‘suitability test’) means that the customer’s preferences are adequately addressed anyway.

The WKO’s criticism was echoed by the UK’s PIFMA (Personal Investment Management & Financial Advice Association), the main body in the sector.PIFMA argues that ESG considerations should not override existing suitability obligations, saying the text as it stands is “wrongly drafted”. It also sees the rules leading to “unrealistic burdens” on investment firms.

PIFMA highlights a potential area of concern where a client may want to invest in a specific ESG product that the advisor does not consider suitable.

“This may result in firms being driven away from investing in ESG”

“As a result it would be difficult to assess the impact on firms in a situation where the product is not suitable yet the client has chosen to invest in it.” PIFMA is therefore asking for examples of good practice on the interaction between the firm’s duties towards clients, suitability and ESG.

And it flags up a possible unintended consequence if the “scope of the obligations and the definitions prove to be unclear or too wide, and this may result in firms being driven away from investing in ESG”.

The first response to the MiFID consultation, which closes this week, was backing from Italian financial advisors body ANASF.