On 10 October 2024, the Central Bank of Ireland (Central Bank) published a Dear CEO Letter to Markets in Financial Instruments Directive (MiFID) investment firms, credit institutions and fund management companies providing MiFID II services to retail clients.
In this article, our Financial Regulation team examines the background to the Dear CEO Letter and the actions it requires of firms. This is the first of two related articles. In a later article, we will take an in-depth look at key themes identified in the Dear CEO Letter.
Dear CEO Letter
The Dear CEO Letter provides feedback to industry on the findings of the Central Bank's thematic review, which examined investment firms' application of the Marketing Communications disclosure requirements as set out in the European Union (Markets in Financial Instruments) Regulations 2017 (MiFID Regulations) and Commission Delegated Regulation (EU) 2017/565 (together, MiFID II). The Dear CEO Letter also outlines the Central Bank's expectations of investment firms in this regard and gives examples of deficiencies and good practices highlighted during the review.
Thematic Review
The review was conducted as part of a Common Supervisory Action (CSA) coordinated by the European Securities and Markets Authority (ESMA). The CSA involved an assessment of MiFID Investment Firms' and Credit Institutions' compliance with the Marketing and Advertising requirements in the context of providing MiFID II services to retail clients. The CSA was undertaken by national competent authorities throughout the European Economic Area (EEA). On completion of the CSA, a report detailing the Central Bank's findings was submitted to ESMA.
The Central Bank highlights the review as an important piece of work in both addressing and mitigating key investor protection risks in the investment sector, particularly considering the digitalisation of financial services and the significant shift in the way in which financial services are delivered and accessed.
Consumer Research Bulletin
The Central Bank also conducted a mystery shopping exercise to better understand how investors engage with marketing and advertising content published by firms. The Central Bank has published a report on the findings of the mystery shopping exercise conducted (Consumer Research Bulletin).
Firms are encouraged to review the findings in the Consumer Research Bulletin, as they provide insights into practices that can make marketing and advertising communications unfair, unclear, or misleading for investors.
Marketing communications and advertisement requirements
Firms are required to ensure that all marketing communications and advertisements are clearly identifiable as such, are fair, clear and not misleading, are presented in a way that is likely to be understood by a retail investor and are appropriate in terms of content and distribution channel for the target audience.
Investment firms' marketing and advertising communications should be developed, designed, and delivered to support investors in making informed investment decisions.
The Central Bank views any material, regardless of the means of dissemination, designed to promote or sell a financial instrument and/or an investment service, as marketing material.
Key Themes
- Marketing and advertising content not clearly identifiable as such – The review undertaken by the Central Bank demonstrated that many firms did not classify all published content as, for example, a 'marketing communication' or an 'advertisement', as required by MiFID II. Moreover, firms have divergent approaches to what they consider to be marketing and advertising content.
- Poor governance and controls – The Central Bank's review identified considerable variances in the relevant governance and control frameworks articulated by firms, particularly in cases where firms have outsourced some or all of their marketing and advertising functions. Specific issues highlighted by the review included firms not having their control environment set out in a policy or procedure document.
- Outsourcing arrangements – Firms remain fully responsible for discharging their obligations when outsourcing critical or important operational functions. The outsourcing of any functions must not result in the delegation of responsibility by senior management of the firm. Firms must document the internal control environment they have in place to ensure the effective oversight of outsourced services.
- Deficiencies in published marketing and advertising content – This includes, for example, imbalanced, unclear and potentially unfair or misleading content on digital channels or risk warning obligations not adhered to.
- Monitoring of published marketing and advertising content and compliance function review – Firms are required to monitor and, on a regular basis, evaluate the adequacy and effectiveness of their systems, internal control mechanisms and arrangements and take appropriate measures to address any deficiencies. Identified deficiencies included an over-reliance on the initial review and approval process and a lack of Compliance involvement post-publication.
- Gaps in identification of target audience – Firms are expected to have an internal control environment that is sufficiently robust to ensure that any information disseminated to clients or potential clients is directed at an identified target audience so that the firm's distribution strategy is ultimately consistent with the identified target market.
Required Actions
The Central Bank requests all Irish-authorised MiFID investment firms, credit institutions and fund management companies providing MiFID II services to retail clients to:
- Review their marketing and advertising practices against the ESMA Report, and the findings, expectations and good practices set out in Schedule 1 of the Dear CEO Letter. This review must be documented and include details of actions taken to address the findings in the ESMA Report and the Dear CEO Letter. This review should be completed, and an action plan discussed and approved by the Board of each firm by 31 January 2025, with the minutes of the relevant Board meeting reflecting the discussions and approval of the Board.
- Where the firm was in the scope of the review and received formal mitigating actions, the feedback in the ESMA Report and the findings, expectations, and good practices set out in the Dear CEO Letter should be considered in conjunction with those mitigation actions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
