Suitability assessment

What does the AFM expect from market participants?

Listed below are the main expectations:

• Market participants provide an understandable explanation of the element of sustainability in the suitability assessment.
• Market participants are thorough in the collection of information about the actual sustainability preferences and do not steer investors towards a particular product or investment strategy.
• Market participants provide investors with suitable products, matching their actual/initial sustainability preferences to the extent possible. They will not steer towards adjusting these preferences.

The main expectations apply to investment firms and banks and to advisers of insurance-based investment products. The additional clarification on these expectations only applies to investment firms and banks (MiFID II).

1. Market participants provide an understandable explanation of the element of sustainability in the suitability assessment

Additional clarification on this expectation:

• Explain why clients are asked to state their sustainability preferences, what they can expect, what choices they have to make and why complete answers are important.
• Explain the three categories of sustainability preferences (taxonomy investments, sustainable investments within the meaning of the SFDR and investments that take into account principal adverse impacts (PAIs)), and the differences between these categories.
• Make sure the explanation matches the client’s understanding.
• Discuss the ESG concept and say what the E, S and G stand for in ESG.
• Clearly explain the difference between investment products with and without sustainability features.
• Provide the explanation before you gather clients’ sustainability preferences, for example through brochures, leaflets or a website. This allows clients to prepare well.
• Test whether the client understands the explanation. Preferably do this before asking for sustainability preferences. This provides scope for additional explanation. Testing afterwards is also possible, for example if you ask for sustainability preferences online.

2. Market participants are thorough in the collection of information about the actual sustainability preferences and do not steer investors towards a particular product or investment strategy

Additional clarification on this expectation:

• Ask new and existing clients about their sustainability preferences.
• Formulate the corresponding questions and the explanation neutrally and without bias, in other words without referring to your own product range or investment policy and without pointing out to clients the consequences of their answers. For multiple-choice questions, also offer options that fall outside the product range.
• Collect information on whether clients have a preference for one or more of the three legal categories of sustainability preferences: taxonomy investments, sustainable investments (SFDR) and investments that take into account principal adverse impacts (PAIs).
• If there is a preference for sustainable investments within the meaning of the SFDR and/or taxonomy investments, ask for the desired minimum proportion. This represents the proportion of an advised or managed financial instrument that must at least meet the requirements for taxonomy investments or sustainable investments within the meaning of the SFDR. This is therefore not about a part or percentage of the portfolio that must meet the client’s sustainability preferences.
• You may use standardised minimum percentages, provided that clients have enough options to choose from. If applicable, also include options that you cannot meet.
• Let clients themselves indicate which PAIs the investments should take into account. You can let clients choose PAIs themselves, or let them choose from a standard list, including the list of PAI families from the SFDR. Then also include PAIs that you cannot meet.
• Clients must be able to state on the basis of quantitative or qualitative criteria how PAIs should be considered. For example, ask clients by means of a ranking how important the stated PAIs are to them.
  In case of portfolio management or investment advice with a portfolio approach, you should ask what part or percentage of the portfolio should meet the sustainability preferences.

3. Market participants provide investors with suitable products, matching their actual/initial sustainability preferences to the extent possible. They will not steer towards adjusting these preferences

Additionalclarification on this expectation:

• Make sure your advice or portfolio management strategy matches clients’ sustainability preferences. In the event of a mismatch, clients can decide to adjust their sustainability preferences so that the mismatch is eliminated.
• Ensure that safeguards and controls are embedded within your policy and implementation processes, so that clients only receive investment products (or recommendations) that match their actual sustainability preferences.
• Include all the necessary information on sustainability preferences that you need to ask for when assessing the suitability of investment products for the client. In your policies and processes, make sure that answers lead to a consistent match with investment products with sustainability features.
• If your product offering does not match the client’s sustainability preferences, you can point out the possibility of adjustment, but without steering the client or providing information on the sustainability content of your product range.
• If clients do not wish to change their preferences, stop providing the service. If clients do adjust their preferences, record both the decision and the reason, for example in your client system, and offer suitable products later if they become available.

 The second ESG update contains additional clarification and good practices from the market for the sustainability requirements for the suitability assessment.