“But the adviser would need to document this, just as they would document, for example, why they picked plan B when plan A looks perfectly suitable and has lower charges.”
Some wordings seem aimed more at avoiding doing something ‘wrong’, rather than stating how to get things ‘right’, says The Lang Cat’s Mr Barrett.
For example, one of the Mifid amendments states that companies “should have in place appropriate arrangements to ensure that the inclusion of ESG considerations in the advisory process and portfolio management does not lead to mis-selling practices”.
This means advisers should not use ESG criteria alone as an “excuse” to sell their own products or products that cost more, the amendment states. Similarly, ESG criteria should not be used to drive portfolio “churning” or misrepresent products.
Mr Barrett adds that if, after a client’s investment strategy has been set up, he or she raises objections to a product choice, “that means you haven’t done your client analysis and ensured suitability”.
“It requires a relevant and realistic level of granularity,” Mr Barrett continues. “ESG is getting more and more mainstream, particularly if you ask the questions in a certain way. If you’re not asking these questions you risk being exposed.”
While the requirements and guidance from both the FCA and ESMA may be awkwardly worded and at times unclear, at least for financial advisers the outcome may be a positive one.
ESG metrics
Alistair Cunningham, a chartered financial planner at Surrey-based Wingate Financial Planning, says the requirements placed on product providers to clearly disclose a variety of ESG metrics (as well as costs) have made it much easier for advisers to assess the products available, and select those that may be appropriate for different kinds of clients.
“Under Mifid II there’s a lot more being forced on fund managers,” Mr Cunningham says. “We can see a lot more information. They’ve been forced to make sustainability criteria more obvious, which makes it easier for us to make an assessment.”
At Wingate, taking ESG-related concerns into account has always been part of the company’s assessment process for bringing in new clients.
“We do it because it’s the right thing to do, rather than because Mifid says we have to,” Mr Cunningham says. “It’s part of our core ethos.”
However, he adds that there “has been a slight change” more recently to the way Wingate conducts its assessments, in particular the company is “more proactive in asking questions” through a more structured process.
“Ethics isn’t something you can just put on,” Mr Cunningham states. “It’s got to run through the whole business ethos.”
This is reflected in the additions to Mifid II, in which the EU states that companies’ senior management “should also consider aspects related to sustainability risk in their respective duties”.
