The European Securities and Markets Authority ("ESMA") just published a statement given the increase in trading activity involving retail clients throughout the COVID-19 pandemic.
Unprecedented market circumstances have led to high volatility and an increase in market, credit and liquidity risks. National Competent Authorities (including the Malta Financial Services Authority) have noted a substantial increase in the number of investment accounts opened in the name of retail clients and a surge in trading activity by retail clients.
ESMA has warned that investment firms now have an even greater duty to abide by the conduct of business obligations under MiFID II. Retail clients are often new to the market or have limited investment knowledge and experience. Investment firms must continue to act honestly, fairly and professionally in accordance with the best interest of their clients.
All information provided to clients must be fair, clear and not misleading. Clients should be in a position to make investment decisions on a well-informed basis. Adequate product governance arrangements are also crucial to ensure that financial instruments are (only) offered when beneficial to a client or potential client. This means that the target market assessment and associated distribution strategy in respect of different financial instruments remain key.
ESMA has also reminded investment firms of the need to undertake the suitability and appropriate tests accurately in accordance with MiFID II. Given the current circumstances, investment firms should pay particular attention to the implications that the COVID-19 crisis may have in respect of a client's financial situation and ability to bear losses.
ESMA and National Competent Authorities will continue to monitor retail clients' involvement in the financial markets and approaches adopted by investment firms.
Originally published 08 May 2020
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.