The European Securities and Markets Authority (ESMA), the EU securities markets regulator, today published a report on retail investor protection. ESMA puts forward proposals that will make it easier for investors to get the key information they need to take well-informed investment decisions, whilst also protecting them from aggressive marketing techniques and detrimental practices.

ESMA notes the key role that marketing communications can play in determining consumer behaviour and influencing investment decisions, especially considering the phenomenon of ‘anchoring bias’ that makes people be over reliant on the first piece of information they receive.

For many retail investors, decisions about if and how to invest are significantly influenced by information conveyed in marketing communications. Retail investors who are subject to misleading marketing communications are more likely to be mis-sold an unsuitable/inappropriate financial product and service, even where correct information is provided through regulatory disclosures (such as PRIIPs KIDs or UCITS KIIDs).

The regulator believes that some guidance to firms on these topics should be set out in supervisory convergence tools such as new ESMA guidelines, to complement and integrate the existing rules. For example, the new ESMA guidelines could state, based on criteria and examples, when a firm’s marketing communications shall be considered unfair (and therefore non-compliant with existing rules), such as when:

• It materially distorts or is likely to materially distort the behaviour with regard to the product or service of the retail investor whom it reaches or to whom it is addressed.
• It contains false information and is therefore untruthful or in any way, including by way of its overall presentation, deceives or is likely to deceive the retail investor.
• It omits material information that the retail investor needs in order to take an informed decision on whether to enter into a transaction and thereby causes or is likely to cause the retail investor to take a decision that s/he would not have taken otherwise.
• It hides or provides in an unclear, unintelligible, ambiguous, or untimely manner material information or fails to identify the commercial intent of a commercial practice if not already apparent from the context, and where, in either case, this causes or is likely to cause the retail investor to take a decision to enter in a transaction that he/she would not have taken otherwise.

ESMA had already provided some guidance to firms on the topic of marketing communications related to CFDs and other speculative products. These ESMA Q&As provided details of practices that would not meet the MiFID requirement to present information to clients and potential clients in a manner that is fair, clear, and not misleading. ESMA believes that sections of those Q&As could be broadened in scope to apply to all products and could be included in the above mentioned ESMA guidelines to help ensure a consistent implementation of the MiFID II Delegated Regulation.

For example, the ESMA guidelines should clarify that the following practices are not compliant with MiFID II requirements:

• Selectively presenting in e-mails, on websites or social media only potential returns of products (in favourable scenarios) without presenting in an equally prominent manner risks, costs, and mandatory warnings.
• Website content or information presented in languages that are not official languages of the Member State(s) where the services are to be provided, or presented in the official language(s) of the Member State(s) where the services are to be provided but that are based on translations of insufficient quality, such that this is likely to hamper the ready comprehension of the information presented;
• Information spread over multiple different webpages or documents in such a way as to complicate its readability and comprehensibility (one example of this practice is firms attempting to hide risks and costs of the products by directing (potential) clients through various hyperlinks);
• Suggesting that complex products are suitable or appropriate for all investors and/or suggesting that an investor can become an experienced investor within a few hours or through limited training as provided by this website/firm;
• Stating or implying in the marketing material that the firm is authorised by an NCA in one Member State when it is actually authorised elsewhere and is instead operating under the freedom to provide services in that Member State.

ESMA says that new guidelines should clarify that:

• mandatory controls should be performed by the compliance function on the content of the marketing communications and periodic reporting should be provided to firms’ management bodies on this topic;
• the firm’s controls should include verifying that marketing communications are actually distributed as approved, i.e., without any material changes being made subsequent to the assessment by the compliance function;
• the firm’s processes and internal controls relevant to the development and distribution of marketing communications should be documented;
• the firm has to ensure a proper record keeping process including for example ‘posts’ by third parties paid or incentivised through non-monetary compensation through the firm, even if those (social) media posts encompass outings that are only online for a limited amount of time or can only be accessed by a group behind a log-in or invitation-only.

In addition, to tackle the significantly rising phenomenon of aggressive marketing of complex/risky financial instruments and investment services to retail clients, a suggestion would be to clarify in Article 69 of MiFID II that NCAs (and potentially, where needed, ESMA) can take effective action against these marketing practices in a swifter manner than is currently possible under the product intervention measures. This would facilitate coordinated and consistent action against aggressive marketing practices across the EU.

To tackle aggressive marketing practices across borders, it is proposed to include in MiFID II a mandate for ESMA to coordinate actions across Member States, where needed. The advice is also to implement a clear notification system across all Member States when one individual NCA has taken action in order for all other NCAs to be aware of this fact.

ESMA recommends including in MiFID II a definition of marketing communications to clarify that (online) advertising is part of the marketing communications tools and that, for example, even firms’ private messages to clients and potential clients on social media would fall under this definition both when done directly by the firm or through third parties (unless, of course, these messages include personal recommendations, in which case requirements on investment advice apply).

Also, ESMA recommends amending Article 69(2)(k) of MiFID II on ‘Supervisory powers’ to clarify, for the avoidance of any doubts, that national competent authorities have the power to take timely and effective action against misleading marketing practices (in a swifter manner than would be possible under the product intervention measures that are instead a pre-requisite for the for application of the Article 69(2)(s) of MiFID II). In addition, the powers to intervene on misleading marketing practices – under Article 69(2)(k) of MiFID II – could be also extended to ESMA, where needed.

While ESMA intends to use existing supervisory convergence tools to address the various issues on misleading marketing highlighted in the Analysis section, ESMA also recommends including in MiFID II an explicit mandate to ESMA to develop guidelines on the topic of marketing communications.