A concern over investment firms that are over offering products and services that are not regulated “gives rise to both investor protection and prudential risks”, the ESMA recently said in a statement.
The EU’s financial markets and securities regulator has addressed the concerns to investment firms that offer unregulated products that have a similar purpose to financial instruments regulated under MiFID II, namely unregulated products with investing for return or hedging purposes.
That involves some products and services like crypto assets, real estate, gold, raw materials, and certain non-transferable securities.
“Some investment firms may encourage the confusion between regulated and unregulated products and services.”ESMA
With the statement, ESMA aims to remind financial firms how to “make investors fully aware of the unregulated status of these products and services”, and that they might not be protected by the same regulations as a regulated one.
If firms are providing both regulated and unregulated items on the website, the ESMA then warns that there is a significant risk that investors may misunderstand what protections they are entitled to.
The regulator also highlights the signification of an investment firm’s reputation, or the ‘halo effect’, which could potentially provide investors with misguided reassurance in relation to the unregulated products and/or services.
All this makes the ESMA recommend that firms look over the impact that unregulated activities may have on their business, including risk management systems and policies.
The ESMA says that firms need to act in accordance with the requirements of Article 24(1) of MiFID II when offering investment services, and therefore “ensure that they are acting fairly, professionally and in accordance with the best interests of their clients”. Firms must also comply with the obligations under Article 24(3), and ensure that all information and advertising is clear and not misleading.
In addition to the risks mentioned, the ESMA also says that “some investment firms may encourage the confusion between regulated and unregulated products and services”. Which, the regulator continues, makes it even more important that “investment firms should be particularly vigilant about additional risks relating to products and/or services outside the scope of financial regulation”.
Therefore, the ESMA recommends that investment firms:
- take full measures to ensure that customers are fully aware of the regulatory status of the product and/or service they are receiving; and
- properly disclose when regulatory protections do not apply to the product or service provided.
MiFID II, Article 24 – General principles and information to clients
(1) Member States shall require that, when providing investment services or, where appropriate, ancillary services to clients, an investment firm act honestly, fairly and professionally in accordance with the best interests of its clients and comply, in particular, with the principles set out in this Article and in Article 25.
(3) All information, including marketing communications, addressed by the investment firm to clients or potential clients shall be fair, clear and not misleading. Marketing communications shall be clearly identifiable as such.