ESMA regulates investment services with a strong focus on enhancing investor protection in the EU. ESMA is committed to ensuring that investment firms treat their customers in a fair and transparent way, that investors are given clear and relevant information to be able to make informed investment decisions and that investors are provided with products matching their needs and investment objectives.
Improving investor protection in the distribution of investment services across the EU is a priority of ESMA’s work. As a result of the broader review of the legal bases of the European Supervisory Authorities (ESAs), the review of ESMA’s founding regulation strengthened ESMA’s role in enhancing investor protection.
As an independent ESA, ESMA’s tasks to promote transparency, simplicity and fairness in the market for consumer financial products or services across the EU, include
- contributing to the establishment of high-quality common regulatory and supervisory standards and practices, in particular by developing draft regulatory and implementing technical standards, guidelines, recommendations, and other measures, including opinions;
- conducting peer reviews of NCAs and to issue related guidelines and recommendations, to identify best practices to strengthen consistency in supervisory outcomes;
- adopting guidelines and recommendations to promote the safety and soundness of markets, and convergence and effectiveness of regulatory and supervisory practices;
- temporarily prohibiting or restricting the marketing, distribution or sale of certain financial products, instruments or activities that have the potential to cause significant financial damage to consumers, or threaten the orderly functioning and integrity of financial markets or the stability of the whole or part of the financial system in the Union;
- collecting, analysing and reporting on consumer trends, such as the development of costs and charges of retail financial services in Member States;
- undertaking thematic reviews of market conduct, to build a common understanding of markets practices to identify potential problems and analyse their impact;
- developing retail risk indicators to timely identify potential causes of consumer and investor harm;
- contributing to the development of common disclosure rules;
- coordinating financial education initiatives of national competent authorities (NCAs);
- developing training standards for the industry;
- contributing to a level playing field in the internal market where consumers and other users of financial services have fair access to financial services and products;
- coordinating mystery shopping activities of NCAs; and
- issuing warnings if a financial activity poses a serious threat to investor protection.
The Investor Protection and Intermediaries Standing Committee: the centre of ESMA’s work on regulating investment services and improving investor protection
The Investor Protection and Intermediaries Standing Committee (IPISC) is the focal point for ESMA’s work in the regulation of investment service and enhancing the protection of investors.
Accordingly, IPISC covers the area of ESMA’s work relating to the provision of investment services and activities to different categories of clients by investment firms and credit institutions, as well as the area of the provision of crowdfunding services by crowdfunding service providers. Particular regard is made to investor protection, including the distribution of financial instruments and, more in general, to authorisation of investment firms and crowdfunding service providers, conduct of business and organisational requirements, product intervention rules, as regulated by the Markets in Financial Instruments framework (MiFID II/MiFIR and their implementing acts in the area of investor protection and the regulation of intermediaries) and the European crowdfunding service providers for business regulation (ECSPR). IPISC reports to ESMA’s Board of Supervisors.
From a practical point of view, IPISC contributes to ESMA’s work in developing technical advice to the European Commission and preparing technical standards, guidelines and recommendations related to the MiFID II/MIFIR and ECSPR frameworks, with the objective to develop a single rulebook, (where appropriate). Additionally, IPISC is also active in building a common supervisory culture by fostering convergent supervisory approaches and practices These activities include the Common Supervisory Action related to MiFID II/MiFIR topics conducted by ESMA and the NCAs and workshops among ESMA and NCAs to exchange supervisory experiences.
IPISC has also established a Consultative Working Group (IPISC CWG) to benefit from the expertise of market participants who are specialised the area of financial service regulation with a particular focus on investor protection. So, the purpose of the IPISC CWG is to provide technical assistance to IPISC in relation to all aspects of its work. This includes the preparation of draft regulatory and implementing technical standards, guidelines and the delivery of advice to the European Commission, as required by the MiFID II/MiFIR and ECSPR legislation.
Key topics of ESMA’s work related to the regulation of financial services and the promotion of investor protection
ESMA’s activities to regulate investment services with a particular focus on improving investor protection include the following core topics:
- Markets in Financial Instruments Directive/Regulation (MiFID II/MiFIR)
- European Crowdfunding Service Provider Regulation (ECSPR)
- Framework on the prudential supervision of investment firms
- Work to improve investor protection from a cross-sectoral perspective including banking, insurance and investment services
The Directive (EU) 2014/65 and Regulation (EU) 2014/600 on Markets in Financial Instruments (MiFID II/MiFIR) entered into force on 3 January 2018, replacing the Directive (EC) 2004/39 on Markets in financial instruments (MiFID I). In light of factors, such as technological change, innovation in financial instruments and the experiences related to the 2008-9 global financial crisis, MiFID II/MiFIR (ie, the MiFID II framework) aims at enhancing the regulation of securities markets. Thus, MIFID II/MiFIR includes an overhaul of, inter alia, the investor protection rules. Accordingly, the MiFID II framework aims at:
- Improving firms’ governance and organisational requirements, among others, by introducing a product governance regime. Its purpose is to enhance investor protection by ensuring that manufacturers and distributors of financial instruments act in the best interest of the client throughout the products’ or services’ life cycle.
- Strengthening firms’ conduct of business rules, including the requirements for the receipts of inducements. Thus, among others, firms providing independent investment advice must not retain any fees, commission, or monetary or non-monetary benefits from third parties (and if firms receive such payments, these must be passed on completely to clients as soon as possible after receipt).
- Granting new powers to supervisors at both national and EU level, such as product interventions powers that enable ESMA and the NCAs to temporarily restrict or prohibit the marketing, distribution or sale of financial products under certain conditions.
To promote investor protection in the MiFID II framework ESMA has been working mainly on:
- Completing a Single Rulebook for EU financial markets by inter alia developing draft technical standards and technical advice as mandated by the legislation of the MiFID II framework and by the European Commission.
- Fostering Supervisory Convergence, among others, by:
- elaborating guidelines, such as on product governance;
- publishing Q&As on questions raised by NCAs and market participants;
- elaborating supervisory briefings, such as on appropriateness;
- adopting Opinions on product intervention measures;
- ESMA conducting a peer review on the supervision of cross-border activities of investment firms;
- publishing statements, such as the one to warn firms and investors about risks arising from payment for order flow and from certain practices by “zero-commission brokers”;
- conducting common supervisory activities, such as on suitability;
- ESMA providing workshops on the practical application of MiFID II requirements, such as on the use of telephone records in day-to-day supervision.
The Regulation (EU) 2020/1503 on European Crowdfunding Service Providers for business (ECSPR) sets out uniform rules across the EU for the provision of investment-based and lending-based crowdfunding services for business financing. The new framework aims at fostering the cross-border provision of crowdfunding services to offer a potential alternative to bank financing for, among others, start-ups and small-and medium-sized enterprises (SMEs), while also ensuring adequate investor protection across the Union.
To ensure investor protection, the ECSPR includes, inter alia, provisions requiring
- the crowdfunding service provider (CSP) to run a ‘knowledge test’ and a simulation of the ability to bear loss for ‘non-sophisticated’ investors; and
- the project owner to prepare (and the CSP to provide) a ‘key investment information sheet’ for all prospective investors for each crowdfunding offer.
While investment firms may be authorised under MiFID II to provide investment services (inter alia, to provide investment advice to clients and execute client orders), the prudential requirements for these firms are set out by the Investment Firm Directive (Directive (EU) 2019/2034 (IFD)) and Investment Firm Regulation (Regulation (EU) 2019/2033 (IFR)).
IFD and IFR both entered into force on 26 June 2021. The IFR will become directly applicable in Member States in December 2022 (18 months following its entry into force). Moreover, Member States have 18 months following the entry into force in of the IFD in June 2021 to transpose this Directive.
The objective of the IFD/IFR framework is to create appropriate and proportional prudential requirements for investment firms. At the same time, systemic investment firms remain subject to the prudential requirements and supervision of the Capital Requirements Regulation and Capital Requirements Directive (CRR/CRD). In other words, the IFD/IFR framework aims at among others, enhancing the stability of investment firms and ensuring their performance.
ESMA cooperates with the European Banking Authority (EBA) in developing the policy mandates related to the AIFR and AIFD, which has resulted in the production of technical standards and guidelines.
The Joint Committee is a forum with the objective of fostering cooperation between the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), collectively known as the three European Supervisory Authorities (ESAs).
More specifically, the European Supervisory Authorities’ Consumer Protection and Financial Innovation Sub-Committee (JC SC CPFI or Sub-Committee) reports to the ESA Joint Committee. The JC SC CPFI tackles financial service regulation from a cross-sectoral perspective (ie, including banking, insurance and investment services) with a particular focus on consumer protection and financial innovation. The legal bases for the JC SC CPFI’s work are the reviewed founding regulations of the European Supervisory Authorities (for example, the reviewed ESMA founding regulation).
The tasks of the Sub-Committee consist of assisting the Joint Committee to ensure the necessary degree of cross-sectoral consistency amongst the ESAs relating to consumer protection and financial innovation. So, the work of the JC SC CPFI includes:
- Completing a Single Rulebook for EU financial markets by developing technical advice, draft technical standards and recommendations where mandated by the European Commission or by legislation.
- Promoting Supervisory Convergence, inter alia, by elaborating and publishing guidelines and public statements.
- Supporting national competent authorities’ initiatives on financial literacy and education.