Translating policy into practice in financial advisory: Sustainability preferences create challenges in customer dialogue

In August 2022 the delegated regulation (EU) 2021/1257 to the Insurance Distribution Directive (IDD) was introduced in Sweden stipulating that sustainability preferences should be integrated into financial advisory. These rules aim to facilitate well-informed investment decisions related to sustainability, while maintaining a high level of consumer protection and thereby promoting sustainable investing. The study focuses on potential issues for retail investors, specifically in relation to the advisory meeting where customers make decisions. Through semi-structured interviews with contextual stakeholders, subject matter experts and financial advisors as well as a smaller market analysis using Morningstar Direct, the study has explored the following research questions. 1) How does the integration of sustainability preferences in pension advice, in accordance with the IDD framework, affect clients’ ability to make more sustainable choices? 2) What are the implications of this for how policy can support well-informed sustainability-related investment decisions? The empirical results indicate that the new regulation has caused frustration and overarching issues include time constraint, lack of supply and complex demands on the customer dialogue and thus customer knowledge. To analyse the empirical material, bounded rationality in accordance with Simon and March’s perspective and Altman (2012) conditions required for financial education and decision making was applied to examine the first question. It is evident that all five conditions required for informed decision-making have limitations, which in turn restrict customers' ability to integrate potential sustainability preferences and thereby make more sustainable choices. The prerequisite for a successful implementation of a boosting policy, was then applied to answer the second question. The analysis shows lacking conditions for effectiveness in the intervention stage, where customers' motivation to learn about sustainability preferences and the teachability of the phenomenon is low. This implies a need for further cooperation between the market and the policy makers to better define customer needs and market capacity.