Fund Distribution Alert 2024-05

On 27 May 2024, European Securities and Markets Authority (ESMA) published a combined report on its 2023 Common Supervisory Action (CSA) and the accompanying Mystery Shopping Exercise (MSE) on fund marketing disclosure rules under MiFID II. 

The CSA and MSE with National Competent Authorities (NCAs) was initiated to examine the application of MiFID II disclosure rules concerning marketing communications. These actions were motivated by the identification of aggressive marketing practices as a risk to investor protection in ESMA's Strategy 2023-2028.

NCAs reviewed how firms such as AIFMs and UCITS management companies handle the creation, approval, and review of marketing communications, including ads. They looked at which control functions were involved and if the same procedures applied to all types of ads, including those on social media. 

They checked if the materials were fair, clear, and not misleading, targeted the right audience, had up-to-date information, and were distributed as approved, and if there were steps to correct any issues. They also considered if firms had different processes for sustainability claims about their own products, services, or third-party products.

Below you will find an overview over the key findings of the report:

• Some firms did not check marketing documents for consistency or kept their figures up to date.

• A few firms lacked proper processes and controls and did not appoint responsible contacts within the organization.

• Firms did not specify actions for outdated information and only monitored their marketing material in that regard after receiving complaints from clients.

• Distributors did not always consider themselves as responsible for the marketing communications made for them by third-party manufacturers. Consequently, the distributors did not carry out any due diligence to verify the contents of the marketing communications drafted by manufacturers which the distributors were transmitting.

• Some findings included unclear marketing material, which was not identifiable as such, unbalanced presentation of risks and benefits, and misleading cost information, where the marketing material would declare a service to be free of cost without mentioning that other fees could or will apply.

• These findings where especially common amongst marketing material distributed via social media.

Based on these findings, the ESMA emphasizes the following points:

• the need for control functions and senior management in developing and overseeing marketing communications, including sustainability claims, to prevent greenwashing.

• in any jurisdiction in which the NCA must approve the marketing material before publication, firms should ensure marketing communications are distributed as approved by the authorities without changes.

• distributors are responsible for the compliance of all marketing communications they transmit.

• the importance of proper review and approval processes for third-party marketing activities.

• record-keeping of all marketing communications, including social media posts as essential for transparency and compliance.

• warning against promotional materials that mislead about the suitability of speculative products for the mass market.

• risk warnings should be prominently displayed, especially for past or future performance claims. Potential advantages of the advertised product should be shown next to the potential risks in a balanced manner.

• sustainability claims must be fair, clear, and supported by evidence. They also must be presented in a balanced manner with other features of the product. Misleading sustainability claims can give the customer false impressions about products or services being ESG-oriented.
• finally, NCAs are urged to use supervisory and enforcement tools effectively, including sanctions for breaches.

ESMA indicates that it will continue to liaise with NCAs on this topic regarding follow-up actions. 

The full report can be accessed in English here.

Please feel free to contact us should you require any additional information.

Partner
+352 22 51 51 7892
said.fihri@kpmg.lu

Senior Manager
+352 22 51 51 7417
henrik.olsson@kpmg.lu