Central Bank reviews identify issues in marketing of complex investment products

22 April 2022 Press Release

Central Bank of Ireland

  • Retail investment market shifting towards increasingly complex products.
  • Review identified a number of poor practices and weaknesses in firms, which increase risks to investors.
  • Firms required to take specific actions to ensure investors are protected.

The Central Bank of Ireland has written to MiFID investment firms, outlining the findings from a series of targeted reviews of Structured Retail Products (SRPs). These reviews examined SRPs manufactured and distributed by investment firms in the MiFID investment sector. A number of areas were identified where further action is needed by firms to ensure their governance and oversight of SRPs keeps pace with an increasingly complex retail investment market, so that investors are appropriately protected.

The reviews found a number of poor practices and weaknesses in firms’ processes, which increase risks to investors. This includes failure by firms to consider potential difficulties investors may have in understanding the complex features involved in some SRPs; failing to present past performance information in a fair and balanced manner; and not including prominent capital at risk warnings in marketing materials.

Director of Consumer Protection, Colm Kincaid, said: “The retail investment market is changing rapidly, with an increasing shift away from traditional, capital protected products to more complex, capital at risk products. As complexity increases, so too do the risks to investors and the responsibilities regulated firms have to protect those investors’ best interests. Our recently published Outlook Report highlighted a number of risks for consumers from changing business practices and ineffective disclosures on investment products, as well as what we expect regulated firms to do to deal with those risks. The work we are publishing today builds on that Report.

“We carried out these reviews because we want to see that regulated firms meet high standards in how they design, manufacture and distribute complex investment products to retail investors. In particular, we want to see that complex investment products are designed with real investment needs in mind, that they are targeted only at investors with those needs and that the risks are properly explained. We are requiring firms to take action to improve their performance on each of these fronts, as well as highlighting good practices which we want to see emulated across the sector.”

The letter requires regulated firms to take action to identify a sufficiently granular target market for SRPs and to drive improvements in the quality and transparency of disclosures to investors of the risks relating to these products. In particular:

  • Given the increasingly complex nature of SRPs, it is essential that the assessment of the target market is done in a proportionate manner, one that considers the nature and complexity of the product. The more complex the SRP, the more onerous and granular the target market assessment must be.
  • Where complex features are proposed, firms must consider if they are appropriate for the retail market and whether they are likely to be understood by the target market. The approval of the use of such features should be subject to robust governance and challenge to ensure they are justified and in clients’ best interests and this should be clearly documented.
  • Where past performance (back-testing) information is presented, it must be fair and balanced, supported by clear narrative and context, and must not diminish the potential likelihood of capital loss. Care must be taken to avoid presenting an overly-optimistic or unbalanced picture of the likely investor outcomes.
  • Capital at Risk warnings must be in a prominent location in all marketing communications and advertisements.
  • In the case of complex products such as SRPs, special care is needed when designing and presenting marketing information to ensure that individual statements, as well as the tone and overall content when read together, remains clear, fair and not misleading. In particular, care must be taken to avoid presenting an overly-optimistic or unbalanced picture of the likely investor outcomes.
  • The risk that a product may be restructured must be disclosed to clients prior to sale.
  • The Central Bank expects firms to adhere to high standards of investor protection, acting in the best interests of investors at all times.  We continue to monitor developments in the retail investment market, and the findings of these reviews and the expectations set out in today’s letter will be considered as part of future supervisory engagements.

Notes to Editors

  • The Markets in Financial Instruments Directive (MiFID II) governs the provision of investment services in financial instruments. It applies to investment firms, wealth managers, broker dealers, product manufacturers, and credit institutions authorised to carry out MiFID activities.
  • MiFID II Regulation 32(1) requires firms that manufacture financial instruments to ensure those instruments are designed to meet the needs of an identified target market of end clients.
  • MiFID II Regulation 32(3) requires firms to ensure that all information addressed to clients is fair, clear and not misleading.
  • MiFID II Regulation 32(6) requires firms to ensure that information on financial instruments includes appropriate warnings of the risks associated with investing in those instruments.
  • MiFID II Commission Delegated Regulation Article 48 (1) requires that, where providing clients with information about financial instruments, firms should include information regarding the functioning and performance in different market conditions, including both positive and negative conditions.