Following the open hearing of the EIOPA about the draft guidelines on the integration of the customer’s sustainability assessment we attended, we took the chance to respond to the EIOPA’s consultation. Here are our response to the EIOPA consultation paper.
Q1. Do you have any general comments regarding EIOPA proposed approach?
The EIOPA guidelines are very helpful and give a lot more clarity about many points of the regulation about the assessment of sustainability preferences.
Though, the level of granularity required by the EIOPA is very high compared to the reality of the market, and even higher than what is sometimes required by the SFDR (see our further point on the qualitative/quantitative approach of PAIs).
Instead of promoting sustainable investments, the proposed approach may lead to the opposite result. Individual customers may be incentivized to share that they do not have sustainability preferences (even if this is the case) to avoid filling out a long and technical questionnaire with the quasi-systematic necessity to modify their sustainability preferences in the end.
For instance, regarding the PAIs, on August 2nd 2021, the European Commission’s amendments to MiFID II for ESG were published[1] in the official journal. The amendments include, among other things, a requirement that European Union MiFID II portfolio managers and advisers ask their clients about their preference to invest in “(c) a financial instrument that considers principal adverse impacts on sustainability factors where qualitative or quantitative elements demonstrating that consideration are determined by the client or potential client”.
In the current EIOPA guidelines and as reconfirmed in the Open Hearing Session of the EIOPA in May 2022, the insurance undertakings and insurance intermediaries should collect the customers’ preferences regarding PAIs where qualitative and quantitative elements demonstrating that consideration are determined by the customer.
We would suggest insurance undertakings and insurance intermediaries be required to only capture the PAIs that the investor wants to be taken into consideration without more details at this stage.
Otherwise, this would be way too complex and confusing for the customers given the general level of financial knowledge and the current ESG products available on the market.
Q2. Guideline 1 – Do you agree that insurance undertakings and insurance intermediaries should explain the purpose of the sustainability part of the suitability assessment and its scope as proposed by the EIOPA or do you believe that the information requirement should be expanded further, and if yes, how?
We agree that customers should be informed about the purpose of the suitability and sustainability assessment.
Given the very limited general level of financial literacy of retail investors, we are convinced that investors should also be educated about the notions of sustainable finance, Environment, Social and Governance (ESG) and about the different objectives of the Taxonomy.
Q3. Guideline 2 – Do you consider that insurance undertakings and insurance intermediaries should collect information on sustainability preferences as the last element within the collection of information on investment objectives?
The collection of information being potentially quite long and most cusrtomers being not very familiar with sustainable finance, we would suggest not to assess the sustainability preferences at the end of the data collection.
This would contribute to avoiding any loss of interest from the investors towards the sustainability questionnaire.
It would then be less costly cognitively-wise for the customer to do the sustainability assessment while his/her attentional pool is not totally consumed.
Moreover, this would be more congruent to assess the investors’ sustainability preferences before or after the questions about risk tolerance or investment objectives.
We would thus suggest the EIOPA give enough flexibility to the financial institutions about when to assess the sustainability preferences.
Q4. Guideline 2 – Consistently with the text of article 2(4) of Commission Delegated Regulation 2017/2359, as amended by Commission Delegated Regulation (EU) 2021/1257, EIOPA proposes to collect the information on the minimum proportion for aspects defined in points a) and b) of Article 2(4) of Commission Delegated Regulation 2017/2359 from the customer in terms of percentages or shares. Do you agree with this approach?
From our perspective, this approach triggers two issues.
First, it would most of the time lead to a 100% Taxonomy-aligned customers preferences, when the percentage of the Taxonomy-alignment of the products available on the market is around 20% maximum.
There would then be an important inconsistency between the customers sustainability preferences and the products recommendation. Customers would then systematically be asked to update their sustainability preferences, which would lead to a strong frustration.
Second, cognitive research shows that the notions of “portfolio” and “percentage” are not very well understood by retail investors.
In particular, the notion of “percentages” can lead to a ratio bias.
Hence, we agree with the proposal to ask the question related to a) and b) either in percentages or shares. We recommend using the notion of shares in priority for a better understanding.
Q5. Guideline 2 – EIOPA proposes that insurance undertakings and insurance intermediaries should collect information on whether the customer chooses the Taxonomy alignment based on all investment of the insurance-based investment product or only based on those assets that are not government bonds, due to the existing limitations to screen taxonomy-alignment of government bonds. Do you agree with this approach?
Recent academic research and surveys have underlined the low level of financial literacy in Europe and the urge for more financial education.
Given the generally low level of financial knowledge, most customers will not make the difference between government and not government products.
Consequently, before asking this question, customers should be educated about these two notions and their knowledge should be evaluated.
Otherwise, clients may answer randomly or refuse to answer this technical question.
Q6. Guideline 2 – When the customer does not determine a specific “minimum proportion” for aspects a) and b), EIOPA proposes that insurance undertakings and insurance intermediaries could guide the customer by providing standardised minimum proportions to help the customer in determining a minimum proportion. Do you believe that the guidelines should specify how granular should be such standardised minimum proportions?
We are convinced that the retail investors should not determine their Taxonomy-alignment percentage on their own.
First, because, as mentioned above, this may generate a ratio bias.
Second, giving the option to the client to choose any percentages of taxonomy-alignment, without any tradeoff of profitability, diversification or availability, will lead many clients to choose a level of 100% of alignment to the Taxonomy.
This is confirmed by the example in the EIOPA guidelines.
“Where a customer expresses sustainability preferences with regard to environmentally sustainable investments as defined under the Taxonomy Regulation or sustainable investments as defined under the SFDR in generic terms, but has not determined a specific minimum proportion, the insurance undertaking or insurance intermediary can help the customer to identify the minimum proportion by approximating the minimum proportion by standardised minimum proportions, such as “minimum 10%, minimum 20%, minimum 30%, etc.”
Though, on the market, the maximum percentage of the Taxonomy alignment of financial products is around 20% maximum. Most insurance companies offer a level of alignment of 5% maximum.
Thus, we would suggest limiting the Taxonomy-alignment to 20% in order to make the financial products recommendation more consistent with the reality of the market. Alternatively, it should be possible to warn the customers that the maximum level of taxonomy-alignment on the current market is 20%, to avoid frustration.
If not, the risk is that the offer will systematically not correspond to the investors’ preferences.
The investors would then have to systematically update their sustainability preferences, which could generate strong frustration amongst advisors and clients.
Q7. Guideline 2 – Do you agree with the suggested approach where customers answer that they do have sustainability preferences, but do not state a preference with regard to any of the specific aspects mentioned under a) to c) or with regard to a minimum proportion with regard to points a) and b) of Article 2(4) of Commission Delegated Regulation 2017/2359, as amended? If yes, do you believe that the supporting guideline should be more prescriptive with regard to the procedures insurance undertakings and insurance intermediaries should adopt in the case where a customer does not determine specific sustainability preferences?
The regulation being very technical and the required granularity being very high, some customers would most probably not be prone nor able to express their preferences regarding points a), b) and c) of article 1 of the Delegated Regulation 2021/1253.
In this case, we suggest that the customer’s sustainability preferences are recorded by the insurance undertakings and insurance intermediaries and are taken into account at a high level in the recommendation process.
For instance, if a customer shares his/her preferences to invest in sustainable products but does not want to share more details regarding a), b), and c), the advisor can recommend any sustainable product in line with the customer’s risk tolerance, investment objective, time horizon, financial expertise and situation.
Q8. Guideline 2 – Do you consider that further guidance is needed to clarify how insurance undertakings and insurance intermediaries should collect information on the customer’s sustainability preferences?
Pursuant to the findings in the domain, we are convinced that sustainability preferences should be assessed through behavioral finance mechanisms in order to capture the customers’ most accurate sustainability preferences and to avoid any biases.
Q9. Guideline 3 – Do you agree with the approach with regard to the periodic assessment?
We completely agree with the suggested approach to update customers’ information frequently.
Research in cognitive science has shown indeed that, as for risk preferences, sustainability preferences (and more generally social values) evolve in time. A frequent reassessment (every year or for every new transaction) is thus necessary.
Q10. Guideline 4 – For multi-option products, EIOPA provides guidance on how to assess whether an insurance-based investment product matches the sustainability preferences of the customer in order to make a personal recommendation. Do you agree with the approach?
We agree with the approach which allows a matching between the customers’ sustainability preferences and the product recommendation.
Q11. Guideline 5 – Do you agree with the approach outlined with regard to the situation where the customer makes use of the possibility to adapt the sustainability preferences?
The adaptation of the customers’ sustainability preferences will be quasi-systematic given:
- The lack of ESG information about most products, at least until 2023;
- The still limited number of sustainable financial products considered as such under MiFID II and IDD available on the market for retail investors;
- The granularity of the assessment required by the regulator and its rigidity regarding the product matching (potentially more than 10 000 possible combinations if no flexibility is allowed).
This adaptation, if it becomes quasi-systematic, could generate strong frustration amongst advisors and customers.
Asking a customer to change his/her sustainability preferences is very intimate and even aggressive. Customers do not expect their financial advisor to ask them to change their values and deep beliefs. This can have different perverse effects such as:
The incentive for advisors to discourage their customers to share their sustainability preferences, to avoid spending 5/6 minutes on a technical questionnaire, knowing in advance that the customer will have anyway to modify his/her preferences in the end because no products will match in detail his/her preferences.
The incentive for the customers to say that s.he has no sustainability preferences, to avoid taking long and complex questionnaires, knowing in advance that no suitable products will be recommended in the end.
Our suggestion will be to either simplify the current regulation to avoid the situation where no suitable products are available and/or to ask to the customer to sign a suitability report, where the differences between his/her preferences and the product are clearly described, but without asking him/her to change his/her sustainability preferences (which will be the equivalent of changing a personality and personal values).
Q12. Guideline 7 – Do you agree with the guidance regarding to the qualification of employees of an insurance undertaking or insurance intermediary employees or do you believe that further guidance on this aspect should be needed?
Sustainable finance being quite complex, employees of insurance undertakings and insurance intermediaries offering insurance-based investment products that promote environmental or social characteristics or that have a sustainable investment objective shall necessarily be sufficiently educated about that and shall thus receive a complete formation about sustainable finance.