The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, has published a combined report on its 2023 Common Supervisory Action (CSA) and the accompanying Mystery Shopping Exercise (MSE) on marketing disclosure rules under MiFID II.
Marketing communications (including advertisements) were mostly found to comply with MiFID II requirements, and ESMA admitted that investment firms generally have procedures in place to ensure compliance with MiFID II of marketing materials, including during their development.
Local regulators, however, raised some concerns regarding sustainability claims in marketing communications, including advertisements.
ESMA highlighted that marketing communications must be identifiable as such, and to contain a clear and balanced presentation of risks and benefits. In cases where products and services are marketed as having ‘zero cost’, they should also include references to any additional fees, the European regulator added.
The financial watchdog added a list of other needed improvements:
- The need for adequate approval and review processes for marketing communications, including advertisements, whether these are prepared by the firm or by third parties;
- Ensuring compliance with legal requirements on the part of distributors for all marketing communications;
- Implementation of adequate record-keeping measures for all marketing material including social media posts;
- Involvement of control functions and senior management in internal processes and procedures related to development, design, and oversight of marketing materials
Misleading “Zero Cost” claims and ESG under scrutiny
ESMA’s investigation uncovered widespread use of “zero cost” marketing claims that misrepresent the true cost of financial services. Many firms advertised their services as free or having no associated costs but failed to disclose other applicable fees. This practice can create a false impression of affordability, potentially leading investors to make decisions based on incomplete information.
The report also examines the marketing of sustainable investments, revealing a mixed landscape. While some firms made commendable efforts to provide detailed and transparent information, many others fell short. Key findings include:
- Limited Use of Sustainability Claims: Marketing materials referencing sustainability were often limited to funds with specific sustainability features. Green bonds and other sustainable instruments were less frequently mentioned, indicating a narrow focus in sustainability-related promotions.
- Generic vs. Specific Claims: Many firms resorted to generic statements about environmental, social, and governance (ESG) aspects, lacking the detailed disclosures required under the Sustainable Finance Disclosure Regulation (SFDR). This lack of specificity can obscure the true nature of the investments being marketed.
- Compliance Issues: The report highlights several instances where sustainability claims were not presented fairly, clearly, or non-misleadingly. Examples include vague references to ESG ratings without explanation, broad statements about a fund’s impact without precise details, and unsubstantiated claims of better performance or lower volatility for sustainable investments.
- The report also critiques promotional practices that claim adherence to international sustainability standards, such as the UN Principles for Responsible Investment (UNPRI) and the Task Force on Climate-related Financial Disclosures (TCFD). Without proper substantiation, these claims can mislead investors about the credibility of the sustainability practices being marketed.
However, the report does highlight positive examples where firms provided detailed disclosures about their sustainability objectives, adhered to international standards, and offered specific information on integrating sustainability into their investment services. These practices were characterized by comprehensive documentation and transparent communication, serving as models for the industry.
