The European Securities and Markets Authority (ESMA, the EU’s financial markets and securities regulator, today issued a public statement to warn investors of risks that arise when investment firms offer both regulated and unregulated products and/or services.
Retail investors often rely solely on the reputation of an investment firm which makes them susceptible to overlooking potential risks of the unregulated products and/or services offered by investment firms (‘halo effect’). This is especially so where the unregulated products have a purpose similar to financial instruments regulated under MiFID II (investment or hedge).
ESMA’s statement therefore aims to remind firms of the behaviours they are expected to adopt in such circumstances (e.g. disclosure, appropriate documentation) to make investors fully aware of the unregulated status of these products and services and of the fact that they may not benefit from the regulatory protections that apply to investments in a regulated product.
In addition, ESMA recommends investment firms take into consideration the impact that their unregulated activities may have on the firm’s business activity as a whole when it comes to risk management systems and policies.