ESMA Sees Growth in ‘Aggressive Marketing’ by Brokers in its Annual Report

The 2017 annual report sets out the European regulator’s objectives, key achievements and activities during the year.

The European Securities and Markets Authority (ESMA) has published its 2017 Annual Report today. The report sets out the regulator’s objectives, key achievements, and activities during the year.

The report focuses on four main points: supervisory convergence (implementing MiFID II and MiFIR), assessing risks by focusing on data quality, creating a single rulebook and supervising credit rating agencies (CRAs) and trade repositories (TRs).

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Investor protection

In the report, ESMA highlighted the rapid increase in the marketing, distribution, and sale of contracts for differences (CFDs) and binary options to retail investors across the European Union (EU). The report noted that broker’s aggressive market techniques and the complexity of these products were concerning.

In the EU, several National Competent Authorities (NCAs) found that between 74 percent and 89 percent of clients trading in CFDs and binary options products lose money.

In 2017, the European regulator received over 400 complaints about NCAs’ potential violations of EU acts. In the report, it says: “it was interesting to note an increasing trend in complaints related to fraud schemes.” The complaints were largely based on NCAs’ failing to supervise investment firms.

The rise of unauthorized or scam firms has been growing rapidly in recent years and remains a key focus for not just EU regulators, but watchdogs across the world.

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To try and combat this trend ESMA continued to coordinate a Joint Group of host NCAs and the Cyprus Securities and Exchange Commission (CySEC). The work of the group was able to implement a significant number of changes to the supervision of the conduct of businesses of Cyprus Investment Firms.

In addition to the supervisory action, CySEC implemented sanctions of over €3 million on some firms, and over the course of 2017 three firms withdrew from the market.

According to the statement: “In 2017, ESMA continued to make progress in its mission of enhancing investor protection and promoting stable and orderly financial markets.”

Moody’s fine

In 2017, ESMA also took enforcement action. The most notable was against Moody’s Investor Service Limited and Moody’s Deutschland GmbH which were fined €1.24 million for negligent infringements of the Credit Rating Agencies Regulation.

Moody’s was issued the fine as it failed to disclose the methodologies used to calculate its ratings.

MiFID II and MiFIR

The MiFID II regulation was created to give retail investors extra protection in the markets. One of the key focuses for ESMA was to prepare brokers for the implementation of the MiFID regulation, which came into effect earlier this year.

In the report, it says the regulator took a number of measures to ensure this was the case. The watchdog published supervisory tools such as guidelines, Q&As and opinion pieces and facilitated agreements between NCAs for the delegation of powers or tasks.

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