ESMA highlights risks arising from investment firms providing unregulated products and services

ESMA has issued a public statement highlighting the risks associated with investment firms offering both regulated and unregulated products and services. The statement emphasizes the potential harm to retail investors who often rely solely on the reputation of an investment firm, leading them to overlook the risks of unregulated products and services. ESMA reminds firms of the behaviors they should adopt in such situations to ensure investors are fully aware of the unregulated nature of these offerings and the absence of regulatory protections.
ESMA raises concerns about the practice of investment firms offering unregulated products and services, as it poses risks to both investor protection and the prudential stability of the firms. Investors may be misled about the level of protection they receive, unaware of the nature and risks of the products, confused or mis-sold products, and encouraged to conflate regulated and unregulated offerings. Investment firms should be vigilant about additional risks associated with products and services outside the scope of financial regulation.
The risks faced by investors in unregulated products and services include the potential for misunderstanding the level of protection and limited recourse in case of adverse events. Investors may rely on the reputation of an investment firm, leading to misguided reassurance. ESMA identifies risks such as investors being misled, lacking awareness of product nature and risks, and confusion or mis-selling due to reliance on recommendations. Investment firms offering unregulated products should take measures to ensure clients are fully aware of the regulatory status of the offerings and disclose when regulatory protections do not apply.
ESMA recommends specific behaviors for investment firms, including clear and effective communication of the regulatory status in all dealings with clients, fair and non-misleading information, avoiding terminology that implies regulation or protection when it doesn’t exist, explicitly stating lost or inapplicable investor protections, and avoiding using regulatory status as a promotional tool. Investment firms should separate regulated and unregulated activities on their websites and ensure client documentation distinguishes between the two. Additionally, investment firms should consider the impact of unregulated activities on their overall risk management systems and policies.
Investment firms engaging in unregulated products and services may face reputational risks and risk non-compliance with their obligations. ESMA urges investment firms to act in the best interests of their clients, comply with regulatory requirements, and have a comprehensive understanding of risks associated with both regulated and unregulated activities. Firms should demonstrate measures taken to ensure compliance, allocate sufficient resources, and manage potential conflicts of interest.