As part of a broad effort to protect investors, specifically retail investors, the Chair of the European Securities and Markets Authority said that ESMA is currently consulting on guidelines to clarify aspects of the MiFID Directive’s suitability and compliance function requirements in order to improve due diligence on gathering information on the client’s background when providing suitable investment advice. In recent remarks, Steven Maijoor said that the guidelines aim to foster convergence of practices in this area across the European Union. ESMA is also developing guidelines on remuneration practices focused on the remuneration practices of investment firms from an investor protection point of view relating, as they do, to the MiFID conduct of business risks and conflicts of interest rules when providing investment services.
Chairman Maijoor also noted that in December of 2011 ESMA issued its first investor protection warning, specifically warning retail investors against dealing with unauthorized firms and individuals offering foreign exchange investments, and alerted retail investors to the main risks involved in forex trading. Given the size of the forex market, and increasing retail investor participation in it, ESMA viewed this pro-action as an essential part of its enhancing investor protection.
He noted that ESMA has established a new Financial Innovation Standing Committee to assist ESMA in fulfilling its investor protection duties. The Committee will facilitate a co-ordinated approach to the regulation of new or innovative financial activities. Through regular data collection on consumer trends, the Committee will seek to identify potential risks to investor protection and financial stability in the financial innovation area; and then produce a risk mitigation strategy.
Critical to this effort will be the MiFID revision proposal empowering both ESMA and national regulators to intervene to protect investors from inappropriate products or services by banning products. This proposal, explained Chairman Maijoor, was developed for a new world of rapid innovation, complex financial markets and products, and increasing retail investor participation in these financial markets. He emphasized that all these developments necessitate the need for higher levels of investor protection.
The key challenge for ESMA is the co-ordination of any action taken by national authorities. ESMA will need to take account of the fact that some national initiatives may be appropriate to address specific national risks, but that other market failures will raise common concerns across the EU. This means, said the Chair, that ESMA will have to manage the inevitable differences and coordinate with national regulators in order to avoid national action creating fragmentation and consumer confusion in the market.
MiFID already sets a high level framework for an investment firm’s organizational requirements, but the Chair praised the European Commission for further specifying the relevance of organizational controls at the stage when firms design their general policies and decide which products are to be offered to clients. This has translated, in part, into the new MiFID concept of ``management body’’. ESMA is considering how this concept can be translated into some form of guidance for firms on internal controls around product development.
The UCITS Directive regulates European mutual funds and allows funds to be marketed to retail investors on a cross-border basis. The revised UCITS IV Directive and its implementing legislation entered into force on 1 July 2011. One of the key reforms of the UCITS IV package is the introduction of the Key Investor Information Document to replace the simplified prospectus.
According to the ESMA Chair, this document is already helping retail investors make informed investment decisions by setting out, in a user-friendly and readable way, key information on such elements as the investment policy, risk and reward, charges and past performance. ESMA’s predecessor, CESR, made a significant contribution to the development of the detailed content and format of this key document through its technical advice provided to the Commission.
The Chair said that ESMA is developing guidelines on the requirements applicable to Exchange Traded Funds (ETFs) that fall under the UCITS Directive. While ETFs offer benefits like low costs of diversification of investor investments, he noted, there are also risks that need to be addressed. Therefore, some of ESMA’s key proposals include an obligation on ETFs to include an identifier in their name and provide additional disclosure, as well as a general strengthening of the standards on collateral received in securities lending activities. ESMA will also set out options on how best to allow investors that buy ETFs in the secondary market to be able to dispose of their units. The guidelines should be issued this summer.
The Chair reminded that many other exchange-traded products compete with ETFs, including notes and certificates, and may not offer the same regulatory protections as are afforded under the UCITS framework. The Packaged Retail Investment Products initiative, including the proposed inclusion within MiFID’s scope of structured deposits, represents a real step forward with respect to improved disclosures and consistent selling practices for competing products. ESMA fully supports this initiative, especially where it delivers consistent investor protection regardless of the legal form of products. However, ESMA said there is a case for also addressing the manufacture and management of such product.