Treatment of customers

Actions for Risk and Compliance functions

Actions for Risk and Compliance functions

Treatment of customers

Investment managers have a pivotal role in supporting their institutional clients and retail customers with their climate ambitions and/or preferences (e.g., institutional investors may need to deliver on their own net zero strategies). Firms can differentiate themselves in the market by bringing their clients and customers along with them on their net zero journey. As they do so, they will need to be alert to how conduct considerations may arise because of the transition.

Investment managers must ensure that they communicate clearly with their customers about how transitioning to net zero affects the value of their products. For example, there is insufficient long-term evidence to suggest that investments in companies transitioning to net zero or pursuing environmental solutions necessarily provide superior risk-adjusted returns. Also, some investments may be long-term in nature and there may be a risk of them performing poorly in the short-term.

Investment managers will need to make any nuances and trade-offs between non-financial and financial objectives, risks and returns clear in fund documentation, client communications and throughout the distribution chain.

Investment managers will need to monitor complaints, particularly in relation to greenwashing, and have a clear escalation process to act as an early warning signal to identify widespread issues.

In the EU, Delegated Acts amending the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive (IDD) require the incorporation of ESG considerations into suitability assessments and product governance from H2 2022. The UK is also exploring how best to introduce sustainability-related requirements for financial advisers³⁹. Where investment managers use advisers to distribute their funds, they should facilitate advisers’ understanding of how their fund range aligns with clients’ varying sustainability preferences, for example, through periodic training.

Actions for Risk and/or Compliance

Ensure customer and client communications are clear, fair, and not misleading.

Ensure customers are treated fairly as investment managers’ product offering changes and that any material changes to the investment strategy or to management fees are disclosed.

Assess how changes in product affordability and/or availability might affect vulnerable customers.

Where required under EU Delegated Acts amending MiFID II and IDD, ensure that ESG considerations are incorporated into product governance and, where investment managers have in-house advisers, ensure that suitability reports capture adequately clients’ sustainability preferences and the reasons why certain products have been matched to the preferences. Compliance can also monitor amendments of suitability questionnaires to ensure that the wording does not attempt to steer clients towards specific preferences.

Ensure the distribution team and financial advisers in the value chain receive adequate training on funds which promote or target climate characteristics.

Ensure that, where they have responsibility for complaints handling, Risk and/or Compliance are trained in relation to funds which promote or target climate characteristics. This will require Risk and/or Compliance to have a good understanding of sustainable investing, interpretation of climate data and non-financial performance metrics so that they are able to determine whether a fund has performed as expected and the reason for this. There should be a consistent internal disciplinary process in the event complaints are upheld. Where it is concluded that greenwashing took place deliberately, cases should be handled in the same way as other serious misconduct cases.