Complex Products – A Kick Up The ESMA

by | Feb 7, 2014

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ESMA tells firms to improve their selling practices for complex financial products

Just weeks after the finalisation of the MiFID II negotiations on the future of European financial product marketing and legislation, the European Securities and Markets Authority (ESMA) has delivered a swift kick up the backside to investment firms which it says are backsliding on the way they adhere to the rules on selling complex financial products to investors.

You’ll recall (or maybe not) that the final version of MiFID II, which was sent out for final approval in mid-January, stepped back from the brink with regard to the proposed restrictions on sales of complex products to unsophisticated investors. Instead, the final document focuses on issues like dark pools and rapid trading algorithms. But that hasn’t deterred ESMA from making its point about adherence to the existing rules under MiFID (the first version of the Markets in Financial Instruments Directive).

 

This time ESMA isn’t just warning investment firms – it’s also wagging the regulatory finger at national supervisors.
 
“ESMA is issuing this Opinion as it is concerned that firms’ compliance with the MiFID selling practices when selling complex products may have fallen short of expected standards,” it says. “The concerns relate mainly to the suitability and appropriateness of complex products that are increasingly within the grasp of retail investors. The Opinion sets out ESMA’s minimum expectations with respect to the conduct of firms when selling complex products to retail investors.”
 
Steven Maijoor, ESMA Chair, said:
 
“Investment firms increasingly sell complex financial products such as warrants, different types of structured bonds, derivatives and asset-backed securities, which were previously accessible mainly to professional investors, to retail investors.
 
“ESMA is concerned that this trend greatly increases the risk that customers do not understand the risks, costs and expected returns of the products they are buying. Therefore, we believe that it is crucial that investment firms act responsibly and in the best interest of their clients.
 
“The level of concern regarding the risk posed by these products to investor protection when MiFID rules are not fully respected is such that we have also issued an EU-wide warning to investors in order to raise awareness about the risks arising from investing in these types of complex products.”
 
The marketing and sale of complex financial products, in particular to retail investors, is an important investor protection area where ESMA wants to ensure a consistent approach to the application of the MiFID conduct business rules – thereby improving supervisory convergence.
 
The areas covered by the Opinion relate to:
• firms’ organisation and internal controls;
• the assessment of the suitability or appropriateness of certain products;
• disclosures and communications in relation to products; and
• compliance monitoring of the sales functions.

 

 

 

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