Member Article

Background

The Malta Financial Services Authority has informed investment firms of the amendments carried out to Part BI of the investment services rules for Investment Services Providers. These amendments seek to implement the provisions of the Commission Delegated Regulation (EU) 2021/1253.

The Commission Delegated Regulation (EU) 2021/1253 amends Delegated Regulation (EU) No 2017/565 in relation to the integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms.

Investment Firms

The European Commission has introduced changes to the MiFID II delegated acts, in order to integrate sustainability factors, risks and preferences into the investment firms’ regulatory obligations. These changes mainly relate to the information to be collected from clients on their sustainability preferences, the assessment of suitability preferences and organisational requirements.

Amendments to Delegated Regulation (EU) 2017/565:

• Article 2 which deals with Definitions has been amended to include definitions of sustainability preferences; sustainability factors; and sustainability risks;
• Article 21 which deals with General Organisational Requirements has been amended for investment firms to take into account sustainability topic when complying with the applicable organisational requirements, such as training to staff and record keeping requirements;
• Article 23 which deals with Risk Management now requires investment firms to take into account sustainability risks in their risk management policies and procedures;
• Article 33 which deals with Conflicts of interest potentially detrimental to a client has been amended to require investment firms to take into account the sustainability preference of the client when identifying the conflicts of interest which may arise in the provision of investment and/or ancillary services;
• Article 52 which deals with Information about investment advice has been amended to include the requirement for investment firms to take into account sustainability factors in the selection process of financial instruments (where relevant);
• Article 54 which deals with Assessment of suitability and suitability reports has been amended to include the requirement for investment firms (when providing investment advice or portfolio management) to collect information from the client to be able to determine whether the specific transaction to be recommended or entered into is also in line with the client’s sustainability preferences.

The investment firm is required to have the necessary policies and procedures in place to ensure that sustainability factors are being taken into consideration when assessing whether the investment service or financial instrument meets the client’s profile. An investment firm shall not recommend financial instruments or decide to trade such instruments as meeting a client’s or potential client’s sustainability preferences when those financial instruments do not meet those preferences. The investment firm is also required to explain to the client or potential client the reasons for not recommending a particular financial instrument and keep a record of those reasons. Where no financial instrument meets the sustainability preferences of the client or potential client, and the client decides to adapt his or her sustainability preferences, the investment firm shall keep records of the decision of the client, including the reasons for that decision.

The suitability report is to include information on how the recommendation provided is suitable for the client and meets his/her suitability preferences.

How to implement the new requirements mentioned above:

• Review of the risk management policies and procedures to include the sustainable risks-related requirements;
• Amendments to the suitable reports provided to clients to cater for the requirements mentioned above;
• Provide training to advisors in order for them to be able to assess and understand the sustainable preferences of the clients; and
• Update the conflicts of interest policy.

Applicability

These changes become applicable as from 2 August 2022. Investment firms are guided to ensure compliance with these new obligations.

Our Regulatory Compliance Services

• MamoTCV’s team of regulatory advisors and compliance professionals supports authorised persons and their compliance functions to remain compliant with their obligations in the ever-evolving regulatory landscape.You can learn more about our scope of services in this area through this link.

This article does not purport to give legal, regulatory, financial or tax advice. Should you require further information or regulatory assistance, please do not hesitate to contact Lara Falzon.

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