1. Central Bank publishes ‘Dear CEO’ letter on the MiFID II Marketing Communications Requirements
On 10 October 2024, the Central Bank of Ireland (“Central Bank”) published a ‘Dear CEO’ letter (“Letter”) setting out the results, good practices and Central Bank expectations, stemming from a recent thematic review by the Central Bank examining investment firms’ application of the disclosure requirements set out in MiFID II (“Review”).
The Central Bank sees the Review as integral to its work in addressing and mitigating key investor protection risks in the investment sector, particularly in view of the digitalisation of financial services and the change in how financial services are accessed and delivered.
Background
The Review was a Europe – wide exercise, coordinated by the European Securities and Markets Authority (“ESMA”). Firms’ compliance with the disclosure requirements under MiFID II was assessed in accordance with a common methodology and framework, together with clear supervisory expectations, ensuring that national competent authorities (“NCAs”) were in a position to assess compliance in a consistent manner, resulting in a convergent supervisory outcome.
The findings of the Central Bank form part of the ESMA report on the application of the MiFID II Marketing and Advertising requirements (“ESMA Report”) and the Central Bank have stated that the Letter should be read in conjunction with the ESMA report.
Some NCAs also conducted a mystery shopping exercise, including the Central Bank, the results of which, the Central Bank advises, should be reviewed by all firms. This consumer research bulletin has been published by the Central Bank and is available here.
Findings
In the Letter, the Central Bank sets out that the ESMA Report identifies a number of key investor protection weaknesses and further states that the findings of the Central Bank, on foot of the Review, are aligned with those in the ESMA Report.
The main findings are divided into six categories, with the Central Bank’s key findings, good practices identified and the Central Bank's expectations, noted in each category. The following is a brief summary of these findings with emphasis placed on the expectations of the Central Bank:
1. Marketing and advertising content not clearly identifiable as such
The Central Bank found that the majority of firms were not clearly identifying all marketing and advertising content with the result that firms were not communicating with existing and potential clients in an effective or transparent way.
Some of the expectations of the Central Bank were highlighted as follows:
- Social media channels should include a description / disclaimer to state that published content should be considered to be marketing material; and
- Firms should carry out regular reviews of published marketing and advertising content to ensure that it is clearly and prominently identifiable as such, and that all information included is fair, clear and not misleading, whether disseminated via digital or traditional means.
2. Poor governance and controls
Although most firms had documented policies and procedures in respect of marketing and advertising in place, they were lacking as regards governance and control frameworks. The Central Bank found this to be particularly prevalent in cases where firms had outsourced some or all of the marketing and advertising function. The Central Bank also found that for all firms, the review and approval process for marketing and advertising content did not differ regardless of the communication channel used, for example, traditional printed media versus social media.
Some of the expectations of the Central Bank were as follows:
- The Central Bank expects firms to clearly define who is ultimately responsible for approving marketing and advertising content; and
- Firms are expected to understand and take account of the drivers of vulnerability that are relevant to the business of the firm, and to design their systems, processes and procedures, including those relating to marketing and advertising, so that investors who find themselves in vulnerable circumstances are reasonably protected from poor outcomes.
3. Outsourcing arrangements
The Central Bank found that some firms which outsource some or all of their marketing and advertising did not have a documented service level agreement (“SLA”) in place. Firms were not able to define the arrangements they had in place with the outsourced service provider, nor were they able to show how they measure the quality of the outsourced service. In most cases it was found that no insights are fed back to a firm by the outsourced provider as regards the effectiveness of published marketing and advertising content.
Some of the expectations of the Central Bank are that firms will:
- Have a comprehensive, overarching outsourcing policy in place, which is reviewed and approved by the board at least annually;
- Effectively supervise the outsourced function and manage any risks associated with the outsourced service and service provider; and
- Have a detailed, documented SLA in place with each outsourced service provider, where the rights and obligations of both the firm and of the outsourced service provider are clearly set out.
4. Deficiencies in published marketing and advertising content
Instances of imbalanced, unclear and potentially unfair or misleading published content on digital channels were identified in a small number of firms. Further, it was found that some firms are not fulfilling their obligations when it comes to contracts for differences in that the relevant risk warning was not included in a compliant way.
Some of the expectations of the Central Bank were as follows:
- Firms should carry out before and after reviews of marketing and advertising content to ensure compliance with all regulatory requirements;
- Firms should have a documented escalation path in place that details the actions required in circumstances where deficiencies are identified in published marketing and advertising content;
- Firms must ensure that all hyperlinks are functioning and bring the investor to the relevant information; and
- Financial instruments must always be clearly labelled setting out the categories to which they belong. In the case of derivative products, the labelling must be included in a manner that ensures it is clear to the investor that they are investing in a derivative product, and not the underlying asset of the product.
5. Monitoring of published marketing and advertising content and compliance function review
The Central Bank found that there is an over - reliance on the initial review and approval process to identify any errors / omissions in marketing and advertising content. Further, the compliance function in a number of Firms is not effectively involved in the marketing and advertising process post - publication.
Some of the expectations of the Central Bank were as follows:
- Firms are required to ensure that adequate internal controls are in place through segregation of duties in respect of the pre - publication approval and post - publication review of marketing and advertising content; and
- Firms should carry out an end – to - end review of the marketing and advertising process on a regular basis.
6. Gaps in identification of target audience
The Central Bank found considerable differences as regards firms’ approaches to defining their target audiences.
Some of the expectations of the Central Bank were as follows:
- The definition of the target audience should be clearly documented as part of the firm’s marketing and advertising policies and procedures, and approved by senior management and the board. In the context of product specific content, this should be aligned to the target market as identified in line with product governance requirements; and
- Firms should measure and record the effectiveness of their published content to ensure it is reaching the defined target audience.
Action Required
The Letter states that all Irish authorised MiFID firms must:
- Review marketing and advertising practices in light of the ESMA Report and the findings, good practices and expectations set out in schedule 1 of the Letter. The review must be documented and include details of actions taken to take account of the ESMA Report and the Letter. The review is required to be completed, with an action plan discussed and approved by the board of each firm, by 31 January 2025; and
- In the case of a firm that was in scope of the Review and received formal mitigating actions, the ESMA Report and the contents of the Letter, should be considered alongside the mitigation actions.
Next Steps
The Central Bank has stated that NCAs will continue to engage in follow up actions based on findings within each jurisdiction. In the case of the Central Bank, this includes engaging directly with those firms where mitigating action is required to improve their investor protection frameworks. As referred to above, the Central Bank has issued a number of risk mitigation programmes requiring firms to take specific action on foot of its findings.
2. Insurance Updates (1) Central Bank publishes flood protection gap report and (2) IRDD and Solvency II Amending Directive approved by European Parliament
1. Central Bank publishes flood protection gap report
On 14 October 2024, the Central Bank of Ireland (“Central Bank”) published its Flood Protection Gap Report (“Report”) following engagement with key stakeholders, including members of the insurance industry and officials from the Department of Finance and the Office of Public Works. The Report aims to assist stakeholders in identifying and managing risks arising from climate change.
The flood protection gap refers to the shortfall between the economic losses arising from a flooding event and insured losses from the same event. The research undertaken by the Central Bank involved examining the nature and scale of the flood protection gap as it currently exists and its possible changes into the future. The Central Bank’s analysis addresses how many homes and businesses are unlikely to obtain flood cover.
Below are the key findings of the report:
- Approximately 1 in 20 buildings have difficulty accessing flood insurance today;
- The estimated average annual cost of inland (river and surface water) flooding is €101m. Severe losses can be much higher than this, with a €510m loss expected about once every 25 years; and
- Ireland is likely to see significantly more rainfall in the future due to climate change, increasing the likelihood of flood events and potentially widening the gap.
In its Report, the Central Bank flagged the need for Ireland to adapt to this situation in terms of physical defences and financial solutions and stated that it cannot be assumed that current approaches to flood risk management will remain viable. The Report further noted that the costs to the State from severe flooding are likely to climb significantly in the years to come. The Central Bank also stated that building flooding resilience will need the requisite level of cooperation and coordination from the relevant stakeholders involved in flood risk management.
The Central Bank has advised that the flood risk protection gap remains a priority and that it will continue to engage with stakeholders with respect to addressing this issue.
Welcoming the publication of the Report, Deputy Governor Sharon Donnery, stated that:
“Lack of access to insurance can and does affect Irish communities and businesses in a very real way, as we have seen again recently. We at the Central Bank are committed to identifying and managing the risks of climate change for the financial system, and so the report we are publishing today seeks to understand the flood protection gap now and into the future.”
2. IRDD and Solvency II Amending Directive approved by European Parliament
On 8 October 2024, the European Parliament (“Parliament”) approved the proposed Insurance Recovery and Resolution Directive (“IRDD”) and the proposed directive amending the Solvency II Directive under the corrigendum procedure.
The Parliament published a corrigendum to the IRDD in August 2024 and a corrigendum to the proposed Solvency II amending directive in September 2024. These corrigenda were announced at the start of the Parliament plenary session on 7 October 2024. They were deemed to be approved 24 hours after the plenary session as there was no request that they be put to a vote.
Next Steps
It is expected that the legislative proposals will be formally adopted by the Council of the EU before being published in the Official Journal of the European Union.
3. Deputy Governor, Derville Rowland, delivers speech focused on the needs and challenges facing retail investors
On 9 October 2024, Deputy Governor of the Central Bank (“Central Bank”), Derville Rowland, delivered a speech (“Speech”) at the International Investment Funds Association Conference. The Speech centred around the needs and challenges facing retail investors and the actions that can be taken to support them.
Recent Changes
The Deputy Governor highlighted the fact that digitalisation has transformed the way in which financial services are engaged with and has also changed the market for retail investors with the result that the retail investment market is more accessible for investors – bringing both benefits and risks. In that regard she noted the following:
- the way in which retail investments are marketed, how information is disclosed and how products are being sold, must be monitored; and
- there is a need to be cognisant of the competition from accessible but unregulated products and the threats from increasingly sophisticated frauds and scams.
Deputy Governor Rowland addressed the expected competition that existing firms will face from ‘challenger firms’ and in that regard, stated that, there will be a need to innovate quickly and invest heavily to meet the increased expectations from consumers. Allied to this, she stated that regulators will also need to be in a position to respond quickly such that innovation is supported and the benefits are channelled in a proportionate way, while being mindful of the risks. Notwithstanding the forgoing, she highlighted the need for more work to done to encourage consumers to move towards investing rather than relying on bank deposits.
The Deputy Governor specifically emphasised the need to be aware of fraud and scams, and noting that they are on the rise, stated that the Central Bank’s innovation sandbox theme is ‘combatting financial crime’, for that very reason. For more detail please see the FIG Top 5 at 5 dated 6 June 2024 and the FIG Top 5 at 5 dated 3 October 2024.
Responding to Challenges
As regards responding to these challenges posed by recent changes, the Deputy Governor stated that the Central Bank takes a broader perspective, listening to insights from various stakeholders – including retail investors – and using them to inform the Central Bank’s annual risk assessment and what should be done to combat those risks. In this regard, she mentioned recent consumer research carried out by the Central Bank in relation to the experience of retail investors, due to be published in October 2024. The Deputy Governor set out some of the findings of that research, including:
- disclosures and the provision of information is a challenge for retail investors, with technical, text – based language cited as a stumbling block. It needs to be considered whether information provided is accessible to someone who has never invested before;
- there is a sense that getting involved with investments is only for those who have a high level of knowledge and monitor the market on a regular basis.
Deputy Governor Rowland noted that we are at a point where we are trying to encourage greater retail participation in capital markets and that this requires an understanding of, and a response to, the challenges facing retail investors. In this regard, she noted the importance of high quality regulation, ensuring that investors are protected and that risks to financial stability are identified and mitigated.
4. MiCA Updates (1) EBA publishes guidelines on redemption plans under MiCA and (2) Commission adopts delegated regulation on RTS for information exchange between competent authorities under MiCA
1. EBA publishes guidelines on redemption plans under MiCA
On 9 October 2024, the European Banking Authority (“EBA”) published its final report on Guidelines on redemption plans (“Guidelines”) under Articles 47 and 55 of the Markets in Crypto - Assets Regulation (“MiCA”).
Each issuer of an asset – referenced token (“ART”) or of an e – money token (“EMT”), is required to develop a redemption plan to ensure the orderly redemption of the ART or EMT when the relevant competent authority deems that the issuer is unable, or likely to be unable, to fulfil its obligations. In that regard, the EBA is required to issue guidelines setting out the following:
- The content of the redemption plan to be implemented after a competent authority has made a decision that an issuer is unable, or likely to be unable, to fulfil its obligations. Timelines as regards review of the redemption plan are also to be set out; and
- The circumstances that will give rise to the implementation of the redemption plan.
The Guidelines apply to all issuers of ARTs and EMTs, however they also clarify that the sections and provisions relating to the reserve of assets do not apply to credit institutions issuing EMTs and to e -money institutions issuing nonsignificant EMTs, given that, under MiCA, such issuers are not required to hold a reserve of assets.
The Guidelines are comprised of four sections as follows:
- The first section addresses proportionality and sets out elements to be considered to ensure the redemption plan contains the appropriate level of detail together with a timeline for review or update;
- The second section relates to general principles including reference to:
- aspects for the achievement of the equitable treatment of all token holders;
- the coverage of the related liquidation costs only after the amount for the redemption claims has been set aside; and
- the importance of the liquidation strategy aiming at the maximisation of the proceeds of the reserve of assets.
- The third section of the Guidelines deals with the content of a redemption plan and focuses on governance requirements, for example, the processes applicable for the development, update and execution of the redemption plan and to the identification of the responsible persons. The Guidelines also cover certain aspects relating to pooled issuance and state that a common plan should be agreed on by the relevant issuers;
- The fourth and final section of the Guidelines address the circumstances that will give rise to the implementation of the redemption plan.
Next Steps
The Guidelines will be translated into the EU official languages and published on the EBA website, coming into effect two months after such publication. Competent authorities will have two months to confirm whether they are in compliance with the Guidelines, following said publication.
2. Commission adopts delegated regulation on RTS for information exchange between competent authorities under MiCA
On 10 October 2024, the European Commission (“Commission”) adopted a delegated regulation (“Regulation”) setting out regulatory technical standards (“RTS”) addressing information to be exchanged between competent authorities under the regulation on markets in crypto – assets (“MiCA”).
Under Article 95 of MiCA, competent authorities are required to cooperate with each other when exercising their supervisory duties in accordance with the provisions of the MiCA regulation. Furthermore, competent authorities are obliged to render assistance to each other, including the exchange of relevant information. The information exchanged needs to be of sufficient scope such that competent authorities can discharge their supervisory, investigative and enforcement duties and functions effectively. Accordingly, Article 95(10) of MICA mandates the European Securities and Markets Authority (“ESMA”) to draft RTS to specify the information to be exchanged between competent authorities.
Articles 1 to 3 of the Regulation specify the information that is to be exchanged depending on the type of asset competent authorities are enquiring about as follows:
- Article 1 deals with information to be exchanged in relation to crypto - assets other than asset - referenced tokens (“ARTs”) or e - money tokens (“EMTs”);
- Article 2 sets out the information to be exchanged in relation to ARTs; and
- Article 3 sets out the information to be exchanged in relation to EMTs.
Article 4 details the information to be exchanged as regards crypto – assets service providers (“CASPs”), for example, information about the members of the management body of the CASP necessary to assess their good repute and suitability.
Article 5 sets out the type of information that is to be exchanged in cases of suspected market abuse, for example, reports of suspicious orders or transactions as referred to in Article 92(1) of MiCA and any relevant indications or evidence supporting such suspicions.
Article 6 details the information to be exchanged as regards precautionary measures under Article 102 of MiCA and includes information on any suspicions of irregularities in the activities of an offeror or person seeking admission to trading of crypto - assets other than ARTs or EMTs, an issuer of an ART or EMT, or a CASP.
Next Steps
The Regulation will enter into force 20 days after its publication in the Official Journal of the European Union.
5. Other European Updates (1) ESMA report on sanctions and (2) Consultation on securitisation framework
1. ESMA publishes its first consolidated report on sanctions imposed by national competent authorities
On 11 October 2024, the European Securities and Markets Authority (“ESMA”), published its first consolidated report on sanctions and measures imposed by national competent authorities (“NCAs”) in the EU (“Report”). The Report details that more than 970 administrative sanctions and measures were imposed across EU member states in financial sectors under ESMA’s remit. Additionally, the Report states that the highest amount of fines were imposed under the Market Abuse Regulation (“MAR”) and the Markets in Financial Instruments Directive II (“MiFID II”).
MAR
In 2023, 299 administrative measures and sanctions were imposed under MAR. The highest number was imposed by Italy at 75. Ireland and Slovakia did not impose any sanctions or measures under this heading in 2023. In this regard the Report notes, taking relative market size in account, that Ireland has a mid – sized market by trading volume of shares.
MiFID II and MiFIR
In 2023, 289 administrative sanctions and measures were issued in 23 member states, with Denmark imposing the highest number. Ireland did not impose any measures or sanctions under MiFID and MiFIR in 2023. The Report further notes that Ireland has not imposed any such sanctions since 2018. In this regard, the Report goes on to note that, looking at market size, Ireland has a mid - sized market in terms of investment firms located in the State, whereas it is a major player in relation to the number of financial instruments (particularly equity and ETFs) available for trading.
Next Steps
Following on from the Report, ESMA has stated that it will work to further foster the effective and consistent implementation of capital markets rules and ensure that similar breaches lead to similar enforcement outcomes across the EU.
2. Targeted consultation on the functioning of the EU securitisation framework
On 9 October 2024, the European Commission (“Commission”) launched a targeted consultation on the functioning of the EU securitisation framework (“Consultation”).
The Consultation seeks to gather the views, and collect evidence from, relevant stakeholders together with feedback as to possible amendments in the forthcoming review of the framework. For more detail on the Consultation, please see Matheson’s Finance and Capital Markets Department’s recent insight.
Of interest to this specific audience are the following:
- Prudential and liquidity treatment of securitisation for banks
This includes questions on the conditions to be met for synthetic risk transfer tests as framed in the EU Capital Requirements Regulation;
- Prudential treatment of securitisation for insurers
This includes questions around whether the prudential rules in the EU Solvency II Directive contain disincentives to investments in securitisation for insurers; and
- Prudential framework for institutions for occupational retirement provision (“IORPs”) and other pension funds
This includes questions around whether the EU IORP II Directive contains provisions which restrict IORPs’ ability to invest in securitisations.
Next Steps
The Consultation is open until 4 December 2024. The responses to the Consultation will feed into the review of the securitisation framework to be considered by the Commission as part of its next mandate.