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Over the course of 2023, the European Securities and Markets Authority (ESMA) will run a common supervisory action on the application of disclosure rules for marketing communications, as per MiFID II.
Disruptions from the start of the decade have transformed financial markets: money tightening from central banks, squeezed liquidity, repricing, fluctuations in inflation and interest rates have all driven volatility and spilled over into asset management. From Q4 2021 to Q3 2022, the 40 largest global asset managers experienced an average 14.9% decline in assets under management, and a revenue fall of 22.9%1.
The past year was particularly challenging for the asset management industry. At product level, EFAMA2 reported fund exits reaching highs not seen since the financial crisis. Net outflows for UCITS and AIFs in Europe reached a total of EUR 278 billion, compared to net inflows of EUR 888 billion in 2021. Net sales for UCITS and AIFs in December 2022 came to just EUR 24 billion, almost half of the EUR 53 billion in sales the month before. Beyond the impact of fund exits on their activity (fund management represents more than 55% of their total AuM), asset managers face difficult times since European AuM declined by 11,8% in Q3 2022, notably due to sharp fall in bond and stock markets but also due to reinternalization of portfolio management by a few institutional investors, notably in France and Portugal3.
The statistics point towards what may be shaky investor sentiment, notably but not exclusively in the retail space. When markets are in a depressed state, it is not uncommon to have concerns around performance; commitment to staying the course of the investment horizon may be tested. In this context, marketing material plays an important role. The marketing materials investors use to make investing decisions (e.g., public information provided on websites, online advertisements, and information sent to clients and prospects) should paint an honest picture of what one can expect regarding investment objectives, risks and time horizons. This will ultimately help investors make a choice aligned with their risk appetite, as well as understand if they should weather the storm during down cycles and periods of unprecedented negative growth, or withdraw to cut further losses.
The market state poses an opportune time for ESMA to run a common supervisory action on the application of disclosure rules for marketing communications4, as per MiFID II. As per the regulation, marketing communications should be “fair, clear and not misleading” for existing and potential clients. While detailed requirements are not the same between retail clients, professional clients and eligible counterparties, the “fair, clear and not misleading” overarching rule applies to all of them. The common supervisory action will be run with national competent authorities throughout the EU during 2023 and will assess the application of the regulation by investment firms and credit institutions.
There are a handful of other trends at play which reinforce the timing for this review. Alternative investments are becoming more accessible to semi-professional and approved retail investors, who have the possibility of curating a new kind of investment portfolio for themselves. In addition, generational aspects are becoming more in focus. Younger and less experienced investors are particularly vulnerable. Gen-Z individuals are entering the workforce and the way they interact with marketing and advertising channels is different and varied. Firms need to now consider and oversee new marketing distribution channels, such as apps, websites, social media and connected persons like influencers. Lastly, as we move further along the sustainability journey, greenwashing practices are under increased scrutiny within marketing communications and advertisements.
ESMA’s initiative is an opportunity to collect information about the application of the regulation, and associated successes, challenges or grey areas. The feedback should enable the EU rule-makers to take steps to enhance investor protection in the years to come.
How EY can help
The EY team aims to support investment fund managers governing body and senior management in designing their product and distribution strategy and defining a development plan accordingly. As co-PMOs, and as consultancy-supporters on specific topics (e.g., regulatory and operational impact, review of market practices, opportunities assessment), our objective is to arm clients to make decisions and lead and manage their distribution projects forward. At post-registration level, the EY team performs a marketing function and policy review against regulatory requirements. Services include:
- Marketing policy and procedure review
- Review/documentation of marketing arrangements
- Distributor due diligence framework review
- Contract review
- Market and regulatory intelligence on distribution related topics (investors’ appetite, investment fund trends and flows, market entry study)
1. Six ways asset managers can prepare for the future, EY Luxembourg
3. EFAMA Asset Management Report, 2022
4. ESMA and NCAs to look at marketing of financial products, Europa.eu
Summary
ESMA’s common supervisory action (CSA) on the application of MiFID II disclosure rules with regard to marketing communications across the EU will take place throughout 2023. The CSA is expected to explore how well firms are complying with the regulation, as well as how they select their audiences for marketing communications (including advertisements). It should also shed light on greenwashing practices, and generational aspects impacting investment materials.