National Competent Authorities (NCAs) in the EU and the European Securities and Markets Authority (ESMA) have observed investment firms offering products and/or services which are outside the scope of financial services regulation in the European Union but that are offered to investors as investment alternatives to financial instruments (which are defined and regulated under MiFID II).

Examples of such products and services that, in some jurisdictions, fall outside the scope of financial services regulation, include crypto assets, real estate, gold, raw materials, certain non-transferable securities (for example non-transferable loan notes).

Specifically on crypto assets, while the Markets in Crypto-Assets Regulation (MiCA) is close to adoption, crypto assets offered by investment firms will continue to be unregulated in most jurisdictions until MiCA applies.

Some Member States have domestic legislation and specialist regimes in place which can provide protections for investors in relation to investment firms selling unregulated products and/or services. However, specialist regimes may not exist in all Member States and may also not address all unregulated products encountered.

ESMA is concerned that the practice of investment firms also offering products and services that are not regulated gives rise to both investor protection and prudential risks. The regulator issued a statement today to set out some of the risks that may arise and the issues that investment firms should pay particular attention to when providing such unregulated products and/or services.

The statement is addressed to investment firms offering unregulated products having a purpose similar to financial instruments regulated under MiFID II, namely unregulated products in which the client is investing for return or hedging purposes.

ESMA considers the following behaviours are expected when investment firms are providing, together with investment services, unregulated products/and or services to investors, in order to ensure that no confusion exist with their regulated offering:

• The regulatory status of the product and/or service is clearly and effectively communicated in all dealings with clients, and at every stage of the sales process. For example, all marketing communications should indicate clearly if a product and/or service offered by an investment firm is regulated or not.
• The information about the regulatory status of the product and/or service is fair, clear and not misleading.
• The terminology used does not imply that the product and/or service is regulated or protected in any way where this is not the case.
• The information provided explicitly states what investor protections are lost/not applicable when investing in a product and/or service deemed to be out of scope of financial regulation, including: compensation schemes, client assets protections, supervision by the national competent authority and recourse to any national regulatory authorities.
• The investment firm’s regulatory status is not used as a promotional tool. When engaging in unregulated activities, information provided to the client or potential client, including marketing materials and other documentation, does not include a reference to the investment firm being authorised/regulated by an NCA.
• Any information on an investment firm’s website related to unregulated activities is clearly distinguished from regulated activities. Investment firms have separate sections on any website they operate for regulated activities and any other activities which they carry out. Client documentation is distinguished accordingly in order to ensure that clients are sufficiently aware of the differences in protection.

In addition, ESMA recommends investment firms take into consideration the impact that their unregulated activities may have on their business activity as a whole as part of their risk management systems and policies.

Finally, ESMA reminds investment firms that they should have a full understanding and comprehensive view of the risks connected with both their regulated and unregulated activities, including the risks to clients, to markets and the risk to the investment firm itself. Investment firms should be particularly careful in all those cases where the scale of unregulated activity might have material impact on their overall risk profile.