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Financial services marketing communications - a growing regulator focus

Sharon Gowdy, Senior Associate

Author: Sharon Gowdy, Senior Associate

19 June 2023

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Area: Cross-border distribution

Financial services marketing communications - a growing regulator focus

Overview

In the past couple of years, regulator attention has turned to the content of firms’ marketing communications. Driven by the objective of enhancing investor protection in the context of a rapidly evolving distribution landscape, there have been a number of developments, both within the EU and beyond, designed to curb aggressive marketing practices, create or build upon existing standards for the content of marketing communications and to be more responsive to the digitalisation of marketing practices.

In the following article we look at some recent developments and trends that are shaping the form and content of marketing communications and consider some proposed changes coming down the track that firms will need to keep a close eye on to ensure that their internal policies and procedures remain compliant.

Marketing communications high on the regulatory agenda

Regulations which govern the form and content of marketing communications often have the same high level principles at their core, regardless of the jurisdiction to which they apply, such as the requirement to be clear, accurate, concise, fair and not misleading. The level of sophistication of the intended recipient will then usually dictate the applicable requirements as to the content of marketing communications and any disclaimers that may be required.

In recent years, a number of jurisdictions have been taking steps to review existing frameworks and develop more robust standards either as part of a wider review of advertising rules or, more specifically, on the content of marketing communications. A high-profile example is the SEC’s introduction of a new marketing rule that came into effect in the US in November 2022. The new rule represented a shift towards more principles-based regulation in this area and a significant overhaul of existing regulation and guidance on advertising and cash solicitation practices for US registered investment advisers. In addition to providing clear definitions for the terms “advertisement”, “testimonials”, “endorsements” and “third-party ratings”, the new rule reversed a previous ban on the use of testimonials in advertising and provided a prescriptive framework for the presentation of performance. While this new rule does not directly impact non-US registered advisers, there are particular structures which may require consideration as to whether it is triggered.

Other regulators actively looking at this topic include the Saudi Central Bank, SAMA, which issued a consultation on draft rules for financial institutions when advertising financial products and services in December 2022. As it stands, these would apply to institutions under the supervision of SAMA, including offshore entities conducting marketing activities in Saudi Arabia. Singapore's MAS also continues to consult on its proposals to put in place additional controls when engaging in prospecting and marketing activities targeting retail through both physical and digital means. Indeed, MAS has noted its intention to issue new guidelines regarding the proper conduct of digital prospecting and marketing activities.

Key themes: digitalisation, social media, retail and ESG

When looking at recent regulator communications and actions, there are some key themes and trends emerging which are further shaping approaches to the form and content of marketing communications:

Digitalisation of marketing practices

Given the increased use of digital methods in recent years, it is no surprise that we have seen a heightened regulator focus on how the core principles can be upheld in this changing distribution landscape. In recent publications on retail distribution and digitalisation and retail market conduct, IOSCO flagged the increasingly sophisticated digital tools used by firms to target and interact with retail clients (e.g. investment apps, gamification and influencer marketing) and recommended a number of policies, many of which are relevant to how marketing communications are prepared and distributed. For example, it is recommended that:

  • firms that offer products through multiple internet domains adopt policies/procedures requiring clear, fair and not misleading disclosure about the underlying legal entity; and
  • firms should be expected to utilise appropriate monitoring programs for the surveillance of online marketing/distribution, including on social media.

Focus on finfluencers/social media

We have seen an increasing number of regulators issuing warnings regarding the practices of 'finfluencers' (social media personalities who post information on investing on platforms such as TikTok, YouTube, Facebook or Instagram), signalling that regulators are gearing up to take action to protect investors. Against the backdrop of ESMA's October 2021 statement on investment recommendations made on social media, European Regulators such as the CNMV in Spain, the NFSA in Norway and the AFM in the Netherlands have issued communications clarifying the rules around investment recommendations made by social media.

Focus on retail

At the heart of many of the initiatives is a drive to enhance the protections in place for retail investors. For example, the UK's FCA has been focused on strengthening financial promotion rules for high-risk investments which are marketed to retail investors as well as issuing a number of consultations on the regulatory framework for online advertising. Retail investors were also at the heart of a 2022 review by Australia's ASIC. The review looked at the marketing of managed funds, to identify the use of misleading performance and risk representations in promotional material. Such review is stated to scrutinise traditional and digital media marketing of funds, including search engine advertising, targeting retail investors and potentially unsophisticated wholesale investors.

ESG

As part of a wider ESG agenda, regulators both in Europe and beyond are stepping up their scrutiny of the use of ESG terminology in marketing communications and the inaccurate labelling of funds, and have been issuing warnings against greenwashing practices.  In its recently published progress report, ESMA assessed that, to mitigate greenwashing risks, market participants have a responsibility to make substantiated claims and communicate on sustainability in a balanced manner and to establish a reliable and well-designed labelling scheme for financial products.

In the wider European context, the EU regulatory bodies have made strides in harmonising standards with the introduction of guidelines on the form and content of marketing communications produced by EU fund managers. They have also set out their clear intentions in the recently adopted retail investment package to introduce measures ensuring that investment firms are fully responsible for the use and content of their marketing communications. These EU wide developments are discussed further below.

ESMA's Fund Marketing Communication Guidelines

As part of the Cross-Border Distribution of Funds package, ESMA issued guidelines applicable to UCITS management companies and AIFMs on the form and content of marketing communications relating to the funds that they manage.  These guidelines began to apply from February 2022. Their purpose is to expand further upon the high-level principles regarding marketing communications which are provided for in the CBDF Regulation and include that marketing communications:

  • are identifiable as such;
  • describe the risk and rewards in an equally prominent manner; and
  • contain clear, fair and not misleading information.

While the term 'marketing communications' is not specifically defined in the guidelines, the guidelines include non-exhaustive lists of examples of the types of communications that would/would not fall within scope. These examples are a good indicator as to just how expansive the European regulatory authorities intend the guidelines to apply. Mandatory disclaimer language is also provided (which can be adapted depending on the form of communication used) and content requirements which set out parameters for how key information on risks and rewards, costs and performance should be presented and adapted, depending on whether the fund is open to retail or professional investors. Importantly, the guidelines don’t repeal any local marketing restrictions/requirements unless such local rules are in contradiction with the guidelines.

Although the EU's endeavour to harmonise requirements has been welcomed by many fund managers, there still remains the challenge that, depending on where a fund manager is domiciled or offers its funds, or the distribution network it uses, it may be necessary to consider more than one set of marketing rules/guidelines when preparing marketing communications. In particular, for those managers whose marketing practices will fall under both EU and US rules, there may be the added challenge of ensuring cross-border compliance with both rule sets, which in some cases are aligned and, in others, conflict.

Further EU requirements to come

Rules governing the form/content of information provided to investors have been a longstanding element of MiFID II with article 44 of the MiFID II Delegated Regulation setting out prescriptive fair, clear and not misleading information requirements applicable to all forms of information provided to retail and professional clients, including marketing communications. However, it is clear that the EU regulatory authorities are minded to go further.

Driven by a desire to assess how investment firms and credit institutions are applying these MiFID II requirements, in January 2023, ESMA launched a common supervisory action (CSA) with national competent authorities (NCAs) on the application of these rules with regard to marketing communications across the EU which is intended to:

review whether marketing communications (including advertisements) are fair, clear and non-misleading and how firms select the target audience for the marketing communications, especially in the case of riskier and more complex investment products;

consider marketing and advertising by firms through distribution channels, including apps, websites, social media and collaborations with affiliates such as influencers; and

collect information about possible ‘greenwashing practices’ observed in marketing communications and advertisements.

In parallel to this CSA, on 24 May 2023, the European Commission announced it had adopted a retail investment package that included requirements to protect retail investors from misleading marketing by ensuring that investment firms were fully responsible for the use of their marketing communications, including where made via social media or other third parties, including 'finfluencers'. In particular, the proposals included:

  • a requirement that investment firms have a policy on marketing communications and practices which needs to be defined, approved, and overseen by the firm's management body;
  • the introduction of a new obligation to clearly identify marketing communications to ensure that they are appropriately attributed to the investment firm on whose behalf they are made;
  • requirements to ensure that essential characteristics of the investment product or service should also be clearly presented in all marketing communications;
  • provisions regarding the division of responsibility with respect to the content and use of marketing communications between manufacturers and distributors of investment products; and
  • new enforcement powers for NCAs which will be able to suspend or prohibit marketing communications or practices and, in more serious cases, request the restriction of access or removal of online content.

Further, on 25 May 2023, ESMA released a statement warning investors of risks that arise when investment firms offer both regulated and unregulated products and/or services and, in such cases, reminding firms to ensure that all marketing communications should indicate clearly if a product and/or service offered by a firm is regulated or not, and that such information should be fair, clear and not misleading.

Final thoughts

Firms should be conducting regular exercises to identify all marketing materials that are subject to rules or guidance and apply necessary changes to ensure compliance with requirements that apply both at a regional and local level. Although the core principles on form and content of marketing communications are often aligned, requirements still vary from jurisdiction to jurisdiction so analysis should be conducted on a case-by-case basis. In particular, closer oversight is required in relation to digital prospecting and marketing activities and, while we can expect more regulatory scrutiny in this regard, jurisdictions are at different stages in addressing the risks posed.  When discussing the rapidly evolving digital tools that firms are using to market/sell financial products to retail clients, IOSCO's summary of the challenge firms face is on point,

“One of the biggest challenges firms reportedly face is keeping up to date with regulatory developments across multiple jurisdictions. Understanding global regulation, which can be jurisdiction-specific, and remaining on top of constantly changing regulation is difficult and costly.”

How aosphere can help

In our Marketing Restrictions services we ask counsel to provide details of the restrictions that apply to various modes of marketing, including the distribution of written materials to investors in their jurisdiction, both in person and via remote means. Our services also include details of form and content requirements for marketing communications and recommended or required sample disclaimer language.

Our two online legal subscription services, Rulefinder Marketing Restrictions and Rulefinder Marketing Restrictions - Asset Management, can help you navigate regulatory complexities by providing practical guidance applicable to the marketing of financial products and services and the marketing of open and closed-ended funds and managed accounts, covering the position for institutional and retail investors across 80+ jurisdictions.

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