Financial Services Regulation and Compliance – Investment Firms Apr 2022


CBI publishes “Dear CEO” letter addressed to MiFID approved firms offering structured retail products

On April 22, 2022, the CBI published a “Dear CEO” letter addressed to MiFID approved companies offering structured retail products. The letter details the CBI’s findings from a series of focused reviews of structured retail products (PRSs) manufactured and distributed by a sample of investment firms in the MiFID investment sector. The letter identified a number of poor practices and weaknesses in the companies’ processes. It also identified other actions required by companies, including the following:

  • The target market assessment should be conducted in a proportionate manner, taking into account the nature and complexity of the product.
  • When complex features are offered, companies should consider whether they are appropriate for the retail market and whether they are likely to be understood by the target market. Approval for the use of these features should be rigorously governed and challenged to ensure they are justified and in the best interests of customers, and this should be clearly documented.
  • Where past performance information (backtesting) is presented, it should be fair and balanced, supported by a clear narrative and context, and should not diminish the potential likelihood of capital loss. Care should be taken not to present an overly optimistic or unbalanced picture of likely outcomes for investors.
  • Venture capital disclaimers should appear prominently in all marketing communications and advertisements.
  • When designing and presenting marketing information, take special care to ensure that individual statements and overall tone and content, read together, remain clear, fair and not misleading. In particular, care should be taken not to present an overly optimistic or unbalanced picture of likely outcomes for investors.
  • Pre-sale disclosure of the risk that a product may be restructured.


ESMA publishes MAR guidelines on delay in disclosure of inside information and interactions with prudential supervision

On April 13, 2022, the European Securities and Markets Authority (ESMA) published the Market Abuse Regulation (MAR) guidelines on the delay in the publication of inside information and interactions with prudential supervision. The guidelines cover the following areas:

  • legitimate interests of the issuer to delay disclosure of inside information
  • situations where delay in disclosing inside information is likely to mislead the public
  • Pillar 2 capital requirements and inside information
  • Pillar 2 capital guidance and inside information

The guidelines are applicable from June 13, 2022.

ESMA letter to EC on MiFID II suitability consultation

On April 13, 2022, ESMA published its letter in response to the European Commission’s consultation on options for improving MiFID II suitability and adequacy assessments. ESMA commented on certain elements of the Commission’s proposals, in particular on the following points:

  • the proposal to apply a single, standardized assessment regime for retail investors that no longer distinguishes between different investment services
  • the significant impact the proposals will have on the current service delivery model
  • GDPR consequences of the proposals
  • the proposal to align the requirements relating to the distribution of investment products which currently fall under MiFID and IDD
  • the absence of mention of knowledge and experience among the information to be collected from customers when consulting the Commission

ESMA publishes guidance on certain aspects of MiFID II suitability and execution-only requirements

On April 12, 2022, ESMA published guidance on certain aspects of the suitability and execution-only requirements of MiFID II. The guidelines cover the following areas:

  • information to clients about the purpose of the suitability assessment and execution only
  • know your customer and know your product
  • match customers with the appropriate products
  • company personnel qualifications
  • record keeping
  • identify situations where the relevance assessment is required
  • monitoring systems and controls to ensure compliance with materiality requirements

The guidelines are applicable from 12 October 2022.

ESMA: ESG funds provided better returns to investors in 2020

On April 5, 2022, ESMA published its fourth annual statistical report on the cost and performance of EU retail investment products. A novelty this year is that UCITS with an environmental, social and governance purpose (ESG) (comprising equity, bond and mixed funds) outperformed their non-ESG counterparts, and were also cheaper overall.

The report examined the market over the 10-year period ending in 2020. Some of the key findings of the report are:

  • Gross Performance: Gross performance in 2020 has been low to negative and highly volatile due to the COVID-19 pandemic.
  • Costs: Total costs were higher for retail investors than for institutional investors, on average. The costs of cross-border funds were higher than those of national funds.
  • ESG UCITS: ESG equity, bond and blend funds were generally cheaper than their non-ESG counterparts, while their performance reflected the strong performance of specific sectors since the COVID-19 crisis. Within the ESG fund category, impact funds performed better than other ESG strategies and sustainable investment funds because the objective performed better in net terms, after including costs, than those promoting environmental characteristics. or social despite slightly higher costs.
  • Retail AIFs: In 2020, retail investors represented only 13% of the total net asset value in the EU AIF market.
  • Retail Structured Products: Total costs were largely driven by entry costs and varied significantly by country and payment type, but did not depend on issue size or underlying type.

ESMA responds to European Commission consultation on EMIR review

On April 5, 2022, ESMA published its response to the European Commission (THIS) consultation on a targeted review of EMIR in relation to the EU central clearing framework. ESMA recommends considering a set of measures that will increase the attractiveness of EU markets and reduce exposure to CCP clearing houses located outside the EU. The recommendations include proposals for:

  • increase the attractiveness of EU clearing markets, for example by expanding and facilitating clearing entities in the EU
  • improve the framework for clearing obligations, for example by modifying the reference of OTC derivatives to uncleared derivatives in the clearing thresholds
  • incentivize EU clearing participants to reduce their exposures to UK CCPs
  • strengthen the EU supervisory framework for central counterparties
  • mitigate remaining risks within UK CCPs

The EC, based on feedback received from stakeholders during its public consultation, will develop a legislative proposal amending the EU central clearing framework.

ESMA has published its final report on the review of the short selling regulation

On April 4, 2022, ESMA published its final report on the review of the Short Selling Regulation (RSS). The report proposes targeted changes to improve its operation, focusing on clarifying the procedures for issuing short and long-term bans, ESMA’s powers of intervention, banning naked short selling and the calculation of net short positions (DKs) and their publication.

The report focuses on three main areas:

  • Empirical analysis of the impacts of emergency measures adopted during the COVID-19 crisis. ESMA is proposing changes to the rules applicable to relevant competent authorities (RCA(s) to issue long-term and short-term prohibitions and for ESMA to adopt intervention powers. The amendments aim to ensure that the relevant procedures are clear, simplified and flexible enough for RTAs and ESMA to deal effectively with emergency situations.
  • Examination of the current framework for calculating NSPs, the list of exempt shares and the so-called location rule to be respected in the event of a short sale. With regard to this last point, it is proposed to strengthen the existing rules on uncovered short selling by introducing record keeping requirements and a certain degree of harmonization of penalties.
  • Assessment of NSP transparency and disclosure framework, also considering recent market events. ESMA proposes the introduction of a centralized ESMA system for the publication and public disclosure of NSPs and an EU-wide obligation for RTAs to periodically publish NSPs aggregated by issuer, integrating all individual positions meeting or exceeding the notification and publication thresholds.

The report was submitted by ESMA to the European Commission.

Sanctions imposed in response to the crisis in Ukraine

Since February, the EU has imposed a number of sanctions in response to the crisis in Ukraine. As the crisis develops and sanctions continue to evolve, the CBI publishes details of new restrictive measures/sanctions that are adopted in this regard, along with any associated EU/UN guidance, on their dedicated website. Web page.