The regulatory requirements relating to compliance are governed in particular by BaFin’s MaComp (minimum requirements for the compliance function and other conduct, organisation and transparency obligations in accordance with Sections 63 et seq. WpHG for investment services companies). As part of regular updates, a new version of the associated circular dated 26 September 2024 is now available on the BaFin website with current administrative practices and the status quo.
Table of Contents
In particular, the new version of the circular contains extensive changes to section BT 5 and section BT 7.1.
Background
The European Securities and Market Authority (ESMA) published updated guidelines “on the product oversight requirements of MiFID II” and “on some aspects of the MiFID II suitability requirements” as early as 2023. The amendment to the aforementioned circular serves to implement these ESMA guidelines.
Sections BT 5 and BT 7.1 of the circular adopt the ESMA guidelines essentially unchanged.
BT 5: Product governance requirements in connection with the provision of investment services and ancillary investment services
The focus of the changes lies in the requirements for distribution and the determination of the target market. The designed financial product must undergo a target market determination. The level of detail is now being expanded with the implementation of the ESMA guideline. The changes are intended to focus the products more strongly on the target customer:
- For products whose value is more susceptible to negative market changes, the market must be determined according to the risk tolerance of the respective customers.
- Consideration of sustainability-related objectives and compatibility with the product within the category “Objectives and needs” (BT 5.2.1 No. 6)
- Inclusion of the cluster approach in target market determination, i.e. the use of a common approach for several products (BT 5.2.2 No. 4 ff)
- Extension of the regulatory requirements to sales companies: Distribution companies should check which distribution strategy is suitable for the respective customer group. In doing so, they should check whether the type and manner of the sales strategy is in the best interests of the respective customer group (BT 5.3.1 No. 4). This is now particularly necessary in the case of nudging (pushing in a certain direction) and gamification techniques (transferring game elements to non-game contexts). The recognition of the integration of so-called “finfluencers” in sales strategies should also be emphasised.
- Products should be regularly reviewed by the concept developers and sales companies for compatibility with the respective sales strategy (BT 5.4.2)
BT 7.1: Suitability test in accordance with Section 64 (3) WpHG, Art. 54, 55 DSV
In addition to the changes in BT 5, BT 7.1 in particular has undergone changes. These relate to the enquiry of sustainability-related objectives with the customer and the consideration of these objectives as part of the suitability test. In addition, the way in which the customer’s knowledge and expectations are queried is relevant. Finally, the changes also focus on the assessment of the reliability of this information.
From now on, investment service providers must explain and clarify the terms and differences between the definitions of sustainability preferences in accordance with Art. 2 para. 7 lit. a-c IR to clients. The aim is to familiarise clients with the concept of sustainability preferences in order to support them in their decision-making.
Enquiry of the customer’s sustainability-related goals and consideration as part of the suitability test
Section 8 BT 7.1.2 sets out the information to be obtained in future on the customer’s sustainability preferences. This is intended to enable a comparison of the client’s sustainability preferences with the specific sustainability factors of financial instruments. Investment service providers must obtain the following information from clients for this purpose:
- Whether the customer has sustainability preferences (yes/no);
- If the customer has answered “Yes” to the above question, whether he/she has one or more sustainability preferences (pursuant to letter a, b or c of Art. 2 para. 7 IR);
- Article 2(7)(a) IR: a financial instrument for which the client or potential client specifies that a minimum proportion should be invested in environmentally sustainable investments within the meaning of Article 2(1) IR
- Article 2(7)(b) IR: a financial instrument for which the client or potential client specifies that a minimum proportion should be invested in sustainable investments within the meaning of Article 2(17) IR
- 2 para. 7 lit. c IR: a financial instrument for which the principal adverse impacts on sustainability factors are taken into account, whereby the qualitative or quantitative elements by which this consideration is demonstrated are determined by the client or potential client
In addition, investment service providers are recommended to take the following aspects into account when making enquiries:
- Information on whether the client’s sustainability preference in the case of (b) or (c) relates to environmental, social or governance-related sustainability factors or a combination of these factors, or whether the client has no preference with regard to the factors.
- If the customer specifies the minimum percentages referred to in points (a) and (b), the companies may also collect this information as a minimum percentage. In order to make this minimum percentage as tangible as possible for the customer, the companies can give the customer a choice between standardised percentages, such as “at least 20%, 25% etc., to determine the minimum percentage.
In order to obtain the client’s sustainability-related information, investment service providers must draw up internal policies and procedures for employees. Within the framework of the requirements of those policies and procedures, full reference should be made to the company-specific written rules. In such a case, the company may take into account any of the aspects listed in Art. 2 para. 7 lit. a-c IR. In this case, the company must document the customer’s decision not to further specify the sustainability preferences in the declaration of suitability.
With regard to suitability, sustainability preferences may only be taken into account once the customer’s knowledge, experience and financial situation have been assessed. Only once this assessment has been carried out can the specific product or a specific investment strategy that fulfils the sustainability preference be offered to the customer in a second step. Conversely, a product that does not fulfil the customer’s sustainability preference may not be offered to the customer. An exception to this is provided for in Section 6 BT 7.1.8, according to which this is possible if the customer adapts their sustainability preferences. The reasons for this must always be documented in the declaration of suitability. However, it should be noted that this adjustment option only relates to the customer’s sustainability preferences and not to the other criteria.
How the customer’s knowledge and experience are queried and how the reliability of this information is assessed
BT 7.1.4 then sets out the assessment of the reliability of customer information. For this purpose, BaFin stipulates that the customer is asked questions that are aimed at assessing the customer’s actual knowledge of specific types of products. Companies can use multiple-choice questions for the assessment. To make the customer’s experience more tangible, they should be asked about previous types of products, frequency and holding period of these investments.
In Section 4 BT 7.1.4, BaFin lists assessment options that should not be used. For example, when assessing the knowledge and experience of a customer, questions that are too general and are answered with “yes/no” should not be asked. In particular, it should be noted here that companies may not predict the experience of customers on the basis of assumptions.
Conclusion
The update of MaComp recognises the importance of the topic of sustainability and shows that this topic must be an integral part of the compliance organisation with immediate effect.
