ESMA sets out views on investor protection topics linked to digitalisation

On 14 December 2023, ESMA published a discussion paper on the impact of digitalisation and the MiFID investor protection framework. The discussion paper contains a number of draft proposals on areas such as layering, digital marketing communications, use of so-called finfluencers, gamification and digital engagement practices (e.g. nudging techniques and possible dark patterns). It is worth noting that the EU introduced the Retail Investment Strategy earlier this year (see our briefing here) in part to respond to the impact of digitalisation on investor protection. That package contained proposals on disclosures and marketing communications and is proceeding through the EU legislative process. ESMA states that the discussion paper is not intended to interfere with that process, but to recommend proposed refinements to the existing MiFID framework. 

The closing date for comments is 14 March 2024. We summarise the key points of the discussion paper below. Firms using digital engagement techniques may find the discussion paper of interest.

Layering

• Firms should be allowed to layer the information provided to retail investors. For example, additional layers of information could be provided through hyperlinks, QR codes, or other similar routes (as long as they do not render the communication misleading or obscure important information). 
• Layering should always be used in the best interests of investors. Layering should not be used to hide or disguise information.

Accessibility and Readability

• Firms should test the reliability, usefulness, and understandability of their digital disclosures, taking into account diverse respondent groups. 
• Accessibility and readability should remain consistent across various client systems (tablet, phone, computer). Visual aids, such as interactive graphs, can enhance comprehension. Firms are encouraged to use simple language and avoid the use of jargon.
• Information should be available in downloadable and user-friendly formats, accessible and storable in real-time within the client's login area.
• All information provided to retail investors needs to be fair, clear and not misleading, regardless of the layer in which the information is provided. For example, firms should not be allowed to inform clients of the benefits of an instrument or service in one layer and then use a hyperlink to explain the risks.

Marketing communications and practices

• Marketing should not create a sense of urgency for investors to "act now" and vital information regarding financial instruments must not be omitted.  
• Instruments should always be noticeably labelled with the categories to which they belong (e.g., CFD on shares, futures, options) and its labelling with the underlying cannot make it unclear that the instrument is a derivative. ESMA notes that poor display of products can lead to mis-selling (i.e. buying the wrong financial instrument).
• Through the use of ‘targeted marketing’, firms have been able to increase the effectiveness of marketing to the target market with the personalised advertisements (e.g. by using cookies). However, there can be a fine line between gathering data in the best interest of the client (getting the right advertisement to the right target market) and gathering data used to market more intensely and aggressively.
• Firms should not use marketing communications relating to financial instruments with high-risk features and/or the more complex financial instruments that are addressed to, or disseminated in such a way that they are likely to be received by, a broad range of retail clients (for example through mass-marketing).
• When firms create and publish educational material that includes (content) marketing and/or may nudge, attract or stimulate the investor to invest in a certain financial instrument and/or become a client of the specific firm, then the material should also be labelled as marketing material.

The use of affiliates

• Firms are and remain responsible for the accuracy of information provided to potential investors on behalf of the firm, including information provided through various distribution channels such as social media and (f)influencers in the context of marketing communications. 
• Firms should have clear policies and procedures in place for working with affiliates, such as (f)influencers, proper disclosure of their affiliations and possible conflict of interest in terms of e.g., remuneration. Firms should keep clear records of the contracts they have with affiliates. This includes policies and procedures in place for selecting and vetting influencers, as well as internal processes in place for reviewing and approving their content.
• Whenever someone, such as a finfluencer, is remunerated to disseminate any type of marketing/advertising (or training) on behalf of the firm, this should be prominently stated in addition to being compliant with MiFID II requirements.

Digital engagement practices (DEPS)

• Firms should have proper internal rules, policies, processes and tools for their use of DEPS including the use of behavioural techniques and gamification elements. 
• DEPs should not intentionally favour more costly products or products that are simply more remunerative for firms to distribute.
• Firms are encouraged to use DEPs to provide (prospective) clients with educational content, in a neutral manner, or when used in ways to guide investors to make better investment decisions and thus acting in the best interest of the client.

Gamification 

• Firms using gamification techniques should focus on long-term investor outcomes depending on the investor’s profile and investment strategy (if known). Firms should not merely focus on high-risk investments, short-term outcomes and/or on individual transactions. 
• Firms should use DEPs and gamification techniques to encourage informed and sensible investment decisions which lead to well-diversified investment portfolios and long-term investing. Use of gamification techniques that encourage investors to trade more should not be allowed in the case of risky products. This includes using techniques such as positive reinforcement immediately after financial transaction (such as messages to congratulate the investor/trader, use of confetti or badges).
• Firms must allow the client to exit the process at any point, without having to complete the transaction. When firms use gamification techniques, firms should display a message that excessive trading may lead to financial harm to investors.
• Firms should not influence the clients’ choices through DEPs such as gamification. Instead, firms should be neutral and unbiased.

Choice architecture and nudging techniques

• Firms should design the choice architecture of their interface to enable and support investors to make informed and sensible investment decisions 
• Use of features likely to influence investor choice, such as setting levels of leverage by default to high amounts should be avoided as they are not in the client’s best interest.

Push notifications and Dark Patterns

• Push notifications can significantly increase retail investor trading in a short period after receiving a notification compared to non-retail investor trading. If the push notification sent by the firm are uniform (i.e., all clients receive the same notification), the firm needs to assess beforehand whether the information contained in that notification is aligned with the target market. 
• Firms should use the structure, design, function or manner of operation of their online interface in a way that encourages investors to make informed and sensible investment decisions.