Whilst the European Commission was announcing a delayed implementation date for the EU Directive on Markets in Financial Instruments and publishing a working paper bristling with more marketing controls, the UK’s Financial Services Authority slated the Directive. What does the EU instrument have in store for the marketing of investment services?
Topic: Financial services
Who: The European Commission
Where: Brussels
When: June 2005
What happened:
Internal Market and Services Commissioner Charlie McCreevy announced a proposed new directive extending by six months the deadline for implementation of EU Directive 2004/39/EC on markets and financial instruments ("MiFID").
At the same time, a third "Working Document" was published indicating the Commission's current thinking on the implementing legislation for MiFID.
Days after these developments, the chairman of the UK's Financial Services Authority described MiFID and all its works as "deeply unsatisfactory".
He said it would impose significant costs on financial services firms in return for questionable benefits and that British firms faced upheaval because of a directive that had not been subjected to the proper EU cost benefit analysis.
No wonder, then, that the European Commission has felt constrained to push back the implementation date of the directive to 30 October 2006, but what has all this got to do with advertising and marketing?
Relevance to marketing?
The answer is "quite a lot".
Now of course financial services marketing or "financial promotions" as they are called in the jargon of the FSA Handbook, are already subject to a raft of regulations and controls. Some might say that the raft is already too large and in no small part responsible for the FSA being seen by many (to quote from a recent speech by Prime Minister Tony Blair) as "hugely inhibiting of efficient business".
The trouble with MiFID is that it promises to impose yet more regulations on financial promotions.
A small comfort is that MiFID does not apply to insurance products, nor does it apply to consumer credit products of any kind. Its focus is on investment services and advice.
Again, there appears to be little to worry about in the body of the Directive itself so far as financial promotions are concerned. Under Article 19, headed "Conduct of business obligations when providing investment services to clients", there is a rule that "all information, including marketing communications, addressed by the investment firm to clients or potential clients shall be fair, clear and not misleading", while marketing communications should be clearly identifiable as such. No surprises here: the "clear, fair and not misleading" mantra is at the heart of the FSA's financial promotion regime. As ever, however, the Eurocrats could not resist going further.
More information requirements
Appropriate information shall be provided, the Directive goes on, in a comprehensible form to clients or potential clients about:
(a) the investment firm and its services;
(b) financial instruments and proposed investment strategies;
this should include appropriate guidance on and warnings of the risks associated with investments in those instruments or in respect of particular investment strategies.
(c) execution venues, and
(d) costs and associated charges…..
so that they are reasonably able to understand the nature and risks of the investment service, and of the specific type of financial instrument that is being offered, and, consequently, to take investment decisions on an informed basis. This information may be provided in a standardised format.
Again, perhaps not too much in the way of surprises here for those who are familiar with the financial promotion-related provisions of the FSA Handbook. But this is not the end of the story. The Commission anticipates yet further regulations being introduced under the umbrella of MiFID. It was in this context that it published its third "Working Document" in respect of MiFID at the end of June 2005 which prompted Sir Callum McCarthy's remarks.
It has to be made clear that the Working Document is not yet a final, agreed text. There is therefore still time theoretically for the FSA and the industry in the UK and other EU countries to make their views forcefully known, and so they might well be inclined to do in the context of marketing, given the delights that Articles 3-5 of the working document hold for those advertising and promoting investment services to consumers.
Article 3
Article 3 sets out in detail the conditions with which information must comply in order to be fair, clear and not misleading. It is only marginal relief here that these provisions only apply to information disseminated in such a way that is to be likely to be seen by, or addressed to "retail clients", who are defined as "a client who is not a professional client".
The Article then goes on to require that such marketing communications shall:
(a) be accurate and give a balanced description of the potential benefits and the risks involved;
(b) include a prominent notification of risks associated with the investment services or financial instruments in question;
(c) be presented in a way that:
(i) is likely to be understood by the persons to whom it is directed, or by whom it is likely to be received;
(ii) does not omit, diminish or obscure the essential items or warnings.
(d) not include or refer to simulated historic returns;
(e) ensure that, where comparing investment services, financial instruments, or persons providing investment services:
(i) the comparison is relevant and is presented in a fair and balanced way;
(ii) the sources of the information used for the comparison are specified;
(iii) the facts that could affect the results of the comparison are included.
(f) If it contains on indication of past performance of a financial instrument or an investment service this must be:
(i) based on a reference period of at least one year;
(ii) clearly state the reference period and the source of information;
(iii) contain a prominent warning that past performance does not guarantee future results;
(iv) where that indication relies on figures denominated in a currency other than that of the member state in which the retail client or potential retail client is resident, clearly state the currency and contain a warning that gains accruing to the investor may be diminished or lost in the process of currency conversion.
(g) If it contains information on forecasted future performance this must:
(i) not be based on or referred to simulated historic returns;
(ii) be based on objective and realistic assumptions;
(iii) contain a prominent warning that such forecasts do not guarantee future performance.
(h) If it refers to a particular tax treatment, prominently state that the tax treatment depends on the individual circumstances of each client and may be subject to change;
(i) Not use the name of any confident authority in such a way that would indicate or suggest endorsement of approval by that authority of the products or services of the investment firm responsible for the information.
Then article 4 goes on to impose "general requirements for information to retail clients".
Article 4.1 reads:
"an investment firm shall provide the information required by Article 19(3) of MiFID and the terms and conditions of any agreement which the firm has entered into with a retail client or proposes to enter into with a potential retail client, to the client or potential client in a durable medium and sufficiently in advance of the commencement of the investment or ancillary service to which the information or the agreement relates to enable the client or potential client to review and understand the information".
Marketinglaw readers will immediately recognise here the approach that currently features in regulations in the FSA Handbook and elsewhere focusing on distance sales of financial services. Here, however, there appears to be no indication that these rules only apply to distance sales. The working document goes on to contain two recitals to Article 4. One of these may be a current help to those advising on distance sales of financial promotions generally and the time frame in which the required disclosures must be brought to the attention of the potential customer is as follows:
"In determining what constitutes the provision of information sufficiently in advance of the commencement of a service to enable a client or potential client to review and understand the information, an investment firm may have regard to the urgency of the situation and the time necessary for the client absorb and react to the specific information provided. The client is likely to require less time to review information about a simple or standardised product or service, or a product or service of the kind he has purchased previously, than he would require from a more complex of unfamiliar product or service".
The second recital reads:
"investment firms are not obliged to provide all the information under Article 6-9 [further articles in the Working Document which impose a raft of yet more obligations of disclosure in the context of investment firms providing information about a financial instrument to a client or potential client] immediately and at the same time provided that they comply with the general obligation to provide the relevant information sufficiently in advance before starting the provision of investment service. They may provide the information either separately, as part of a marketing communication, or by incorporating the information in the client agreement".
Article 4.2 then provides some relief by indicating that in appropriate distant sales scenarios, the required disclosures and terms and conditions of the client agreement may be supplied after the commencement of the services and provided in the existing distance sales and financial services legislation.
Still more disclosures
And that is not the end of the further disclosures required by the Working Document. Article 5, under the heading "Information about the investment firm for retail clients and potential retail clients", then contains a raft of additional requirements in this context as to the provision of information that the investment firm must give about the firm itself and its services as required by Article 19.3 of MiFID.
There then follow no less than 11 fields of information that must be supplied.
Some of these are as follows:
(a) the name of the investment firm and the contact details necessary to enable clients to communicate effectively with the firm;
(b) the languages in which the client may communicate with the investment firm;
(c) the methods of communication to be used between the firm and the client for the sending and reception of orders;
(d) a statement to the effect that the investment firm is authorised and the name of the competent authority that has authorised it;
(e) where the firm is acting through a tied agent, a statement of the fact that the tied agent is registered in accordance with MiFID and a member state in which it is a registered;
(f) where the firm is acting through any other representative established in the member state in which the client or potential client is resident, the business address of the representative;
(g) the nature, frequency and timing of the reports on the performance of the service to be provided by the investment firm to the client in accordance with MiFID;
(h) if the firm holds client assets, a general description of the effects of the rules relating to the holding and protection of client assets.. and so it goes on.
In addition to these required disclosures, where an investment firm provides or proposes to provide portfolio management services to a retail client, then there is yet more information that must be supplied, 5 types in all. These are:
(a) the types of financial instruments that may be included in the client portfolio and the types of transactions that may be carried out in such instruments, including any limits;
(b) the method and frequency of valuation of the financial instruments in the client portfolio;
(c) details of any delegation of the discretionary management of all or part of the assets in the client's portfolio where relevant;
(d) the way in which management objectives are established, the level of risk to be reflected in the manager's exercise of discretion, and any specific constraint on that discretion;
(e) a specification of any benchmark against which the performance of the portfolio will be compared. Any such benchmark shall be based on widely used financial indicators which are produced by a third party and are consistent with the management objectives.
Articles 6-9
Not content with the above requirements, Articles 6-9 of the Working Document then go on to require yet more categories of disclosure in the area of information about financial instruments, information about costs and associated charges and information requirements about safeguarding of client assets, although provided the potential client passes an "investor aptitude test" some of these disclosure obligations fall away.
In a coda to the marketing-related provisions of the working document, Article 10 entitled "Content of marketing communications" provides:
1. An investment firm shall take all reasonable steps to ensure that the information contained in its marketing communications is consistent with any information the firm provides to clients in the course of carrying on investment and ancillary services;
2. Where a marketing communication to retail clients refers to a particular financial instrument or type of financial instrument or to an investment or ancillary service, it should also include a precise and balanced description of the nature and risks of the instrument or service in question.
Why this matters:
Given the above, it is hardly surprising that the FSA and no doubt many other regulatory bodies across Europe are groaning under the prospective weight of yet more regulation in the financial services arena.
Admittedly many of these requirements are already imposed by the FSA's Handbook, but as the FSA gets to grips with the enormous increase in its responsibilities since the extension of its regime to mortgages and insurance, these further burdens will be as welcome to the regulator as it will be to investment services providers.
