ESMA statement on offerings of unregulated products/services by regulated firms
As the clock ticks down to the application of MiCA (the markets in crypto-assets regulation, expected to apply across the EU from the end of 2024 (or slightly earlier in the case of stablecoins)) – see our insights here), ESMA has issued a public statement on the risks inherent in the provision of unregulated products and services by investment firms.
While the statement doesn’t analyse risks on a product/service-by-product/service basis, non-exhaustive examples given by ESMA in its statement of types of unregulated products / services offered in several EU jurisdictions are crypto assets, real estate, gold, raw materials, and certain non-transferable securities (such as non-transferable loan notes).
From an investor protection perspective, a key ESMA concern is that investors may not understand that a specific product / service is unregulated if details are provided on the same webpage as the relevant investment firm’s regulated products.
From the perspective of regulated investment firms, ESMA is also concerned about:
- the reputational risk for those firms in offering unregulated higher risk products / services (e.g. crypto-assets and non-transferable securities) – investors who lose their (unprotected) investment may file complaints regarding the absence of clear risk-related information;
- the risk that offering unregulated products / services could impact the firm’s compliance with the rules relating to the regulated side of its business and the sound and prudent management of its operations.
In the statement, ESMA recommends that investment firms:
- take all necessary measures to ensure that clients are fully aware of the regulatory status of the product / service
- clearly disclose to clients when regulatory protections do not apply to the product / service.
It also highlights the following ‘expected behaviours’ of investment firms providing both regulated and unregulated products / services to avoid investor confusion about the relevant firm’s offering:
- clear and effective disclosure of the regulatory status of the product / service in all dealings with clients and at every state of the sales process (including in all marketing communications)
- information on the regulatory status of a product / service must be fair, clear and not misleading
- the terminology used must not imply that the product / service is regulated / protected in any way
- details of the investor protections that are not available / out-of-scope (such as compensation schemes, client asset protections, regulatory supervision etc.) must be explicit
- the investment firm cannot use its regulatory status as a promotional tool (i.e. when providing information on an unregulated product / service to (potential) clients) the material provided should not include a reference to the investment firm being authorised / regulated by a national competent authority)
- regulated and unregulated products / services must be dealt with in separate sections of an investment firm’s website
- firms should fully understand how their offering of unregulated products / services could impact their overall risk profile
- firms should ensure that their compliance functions are sufficiently resourced so as to be able to properly identify and manage any potential conflicts of interest arising from the provision of both regulated and unregulated products / services
We expect regulators to be very focused on unregulated offerings, in particular in the crypto-asset space, in the lead-up to MiCA coming into force as the Commission and EU regulators seek to balance investor protection with measures to encourage retail investor protection in the capital markets (see our update on the Commission’s retail investment strategy here: Retail Investors and the EU Capital Markets: Commission publishes retail investment package).
To discuss any aspect of above, please get in touch with your usual contact in our Financial Regulation group.