ESMA highlights risks arising from securities lending to retail investors

ESMA has issued a public statement on securities lending to retail clients, emphasizing the risks and investor protection concerns associated with this practice. Securities lending and other SFTs can provide extra returns on financial instruments, but they also come with significant risks such as counterparty and collateral shortfall risk.
To protect retail investors, ESMA outlines the obligations of firms engaged in securities lending and clarifies certain important requirements under MiFID II:
– Safeguarding Client Assets: Firms must make adequate arrangements to safeguard the ownership rights of clients and obtain their express consent before using their financial instruments in SFTs.
– Written Agreement and Information Provision: Firms must provide clear and accurate information to clients before entering into SFTs, including the terms and risks involved. The terms on which SFTs generate a return for the client should be included in the written client agreement.
– Revenue Allocation: ESMA stresses that revenues from securities lending should directly accrue to the retail client, net of a normal compensation for the firm’s services. Any indirect benefits, such as lower trading commissions for clients, cannot justify exposing clients to the risks of securities lending.
– Express Prior Consent: Firms should not seek a client’s consent for SFTs through their general terms and conditions. Instead, clients must provide express prior consent in writing, and firms should give specific prominence to obtaining such consent, ensuring clients are fully aware of the risks involved.
ESMA will continue to monitor securities lending to retail clients and may issue further technical advice to the EC if necessary.