KPMG warns sustainability rules are reshaping investment advice compliance

KPMG Cyprus's July 8 note said ESMA's review of MiFID II sustainability requirements is moving the issue into the mechanics of investment advice, where firms have to show how they collect client sustainability preferences, translate them into products and explain the logic behind the recommendation. For KPMG's financial-services advisory, compliance and regulatory risk teams, that shifts the work from policy drafting to workflow design, control testing and remediation.

ESMA published its public statement on May 6, 2026 after launching the Common Supervisory Action on October 3, 2023. The exercise covered client sustainability preferences, product categorisation, the portfolio approach and target-market assessment, and ESMA said the sustainability requirements had applied since 2022 after amendments to the MiFID II Delegated Acts. The practical effect is that sustainability now sits inside suitability reviews and product governance, not just in disclosures and annual policy updates.

The timing matters for firms still adjusting their advice processes. ESMA said the supervisory exercise ran through 2024 and 2025, while the broader rulebook was also shifting around it, with the Retail Investment Strategy and the review of SFDR both in play. In the May statement, ESMA told national competent authorities to use a proportionate approach during the transition period, favoring dialogue over enforcement unless there are clear breaches or mis-selling. For investment firms, that leaves room for supervisory conversation, but not for weak evidence.

Cyprus has already translated that pressure into action. On January 31, 2025, CySEC issued Circular C680 and said it would carry out on-site visits and desk-based reviews of selected Cyprus investment firms, with a review window from August 2, 2022 through December 31, 2024. That is the kind of supervisory scope that forces firms to pull together client files, suitability notes, product taxonomy records and governance evidence in a way that can stand up to inspection.

For KPMG teams, the client demand now sits inside the day-to-day machinery of wealth management. Advice journeys, model governance, product review processes and client disclosures all have to line up, and the skill set reaches beyond ESG knowledge into customer data, suitability logic and documentation discipline. EY Luxembourg said ESMA's findings showed progress but uneven implementation across firms and jurisdictions, with recurring problems including incomplete preference collection, client misclassification, oversimplified answers and rigid advisory processes. That mix points to more repeatable work for KPMG's risk and asset-management practices, especially where firms need help fixing controls before regulators ask sharper questions.