News Update Financial Regulatory

In this News Update we discuss: ESMA's first guidance on the use of Artificial Intelligence (AI) in the provision of retail investment services; the European Council's position on the new retail investment package strengthening the EU’s rules on retail investor protection; and reports on greenwashing in the financial sector by ESMA, EIOPA and EBA.

We further highlight some other financial regulatory publications issued since our last News Update. Subscribe here to the News Update Financial Regulatory.

ESMA publishes guidance on the use of Artificial Intelligence (AI) in the provision of retail investment services

In its recently published statement, the European Securities and Markets Authority (ESMA) outlines the potential benefits and risks of AI for firms and clients. It also provides guidance on how to comply with requirements under the Markets in Financial Instruments Directive (MiFID II) when using AI tools. The statement covers various aspects of AI application, such as customer service, investment advice, portfolio management, compliance, risk management, fraud detection and operational efficiency. ESMA identifies the following risks:

• Lack of accountability and oversight as a result of over-reliance on AI tools by service providers and clients;
• Lack of transparency and explainability, as many AI tools are 'black boxes' with unclear decision-making processes;
• Security and data privacy concerns because of the collection, storage and processing of large amounts of data by AI tools; and
• Insufficient quality of the AI tool products.
  
  

ESMA emphasises the importance of acting in the best interest of the client, regardless of the tools used by the firm, and of providing clear and fair information to clients on the role of AI in investment decision-making processes. The statement also reminds firms of their obligations regarding organisational requirements, such as governance and risk management. ESMA encourages firms to seek further resources and engage with their supervisory authorities. Together with national competent authorities (NCAs), it will keep monitoring the use of AI in investment services and the relevant EU legal framework to determine if further action is needed in this area.

The European Council's position on the new retail investment package strengthening the EU’s rules on retail investor protection

The Council of the EU recently published its position on the retail investment package as proposed by the European Commission. The package comprises a set of proposals to strengthen the EU's rules on retail investor protection. It aims to support individual consumers who wish to invest on the EU's capital markets, by better protecting their investments, providing them with clearer information about investment products and ensuring more transparency and disclosure.

The Council's main changes to the package include removing the ban on inducements for execution-only sales and introducing a new concept of 'Value for Money' for investment products. Instead of the inducement ban, the Council has strengthened the safeguards accompanying all inducements with, for example, enhanced transparency and disclosure about what payments are considered as inducements, their costs and their impact on investment returns. The new Value for Money concept aims to ensure that costs and charges related to a product are justified and proportionate with regard to their performance, other benefits and characteristics, their objectives and, if relevant, their strategy. We will be closely monitoring the interinstitutional discussions on these important topics for the market players.

Reports on greenwashing in the financial sector by ESMA, EIOPA and EBA

The European Supervisory Authorities (ESAs), comprising the European Securities and Markets Authority (ESMA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Banking Authority (EBA) recently published their final reports on greenwashing in the financial sector. In each report, the ESA in question takes stock of the current supervisory response to greenwashing risks within its area and notes that NCAs are already taking steps in the area of supervision of sustainability claims. In addition, the ESAs provide a forward-looking view on how sustainability supervision can be progressively enhanced in the coming years. Supervision of greenwashing risks is primarily carried out by the Dutch Authority for the Financial Markets (AFM), with a focus on transparency and consumer protection. In addition, the Dutch Central Bank (DNB) has a prudential supervision mandate, which includes considering the reputational and legal risks of financial institutions that may result from greenwashing.

• The ESMA report focuses on sustainability claims on capital markets.
• The EIOPA report focuses on misleading or unsubstantiated sustainability claims in the insurance and pension sectors.
• The EBA report focuses on the risk of greenwashing in the banking sector.
  
  

Other financial regulatory publications

We have highlighted a selection of other publications by legislatures and regulators for the financial markets and financial supervision since our May 2024 News Update.

AFM

• On 5 June 2024, the AFM published an update of its Guidelines on the Prevention of Money Laundering and Financing of Terrorism Act (Wet ter voorkoming van witwassen en financieren van terrorisme) and the Sanctions Act 1977 (Sanctiewet). The update was prompted by research findings, an increased focus on Sanctions regulations and a need for further explanation of the risk-based approach. For more information, please refer to the AFM's news item (in Dutch only).
• On 12 June 2024, the AFM published news (in Dutch only) of the EUR 620,000 fine it had imposed on a 'tax and financial adviser' for collaboration with illegal asset manager Grinta Invest. The 'tax and financial adviser' E.J. Hogervorst promoted this illegal party, introduced investors and advised them to invest large sums of money in Grinta Invest. He was therefore guilty of aiding and abetting illegal asset management. Partly because of this 'tax and financial adviser', investors invested and Grinta Invest was able to make off with their money. The AFM issued a warning about Grinta Invest in November 2021.
  
  

DNB

• On 6 June 2024, DNB launched the public consultation on this year's amendment round of the Deposit Guarantee Scheme for banks. Interested parties are invited to submit their responses to the consultation to DNB by 19 July. This consultation is part of the periodic process of improving and adding to the Single Customer View policy rule and the Scope and Execution policy rule.
  
  

ESAs

• On 18 June 2024, the ESAs published a Joint Opinion on the assessment of the Sustainable Finance Disclosure Regulation (SFDR). The ESAs call for a coherent sustainable finance framework that caters for both the green transition and enhanced consumer protection, considering the lessons learned from the functioning of the SFDR. They recommend introducing a product classification system based on regulatory categories – such as the categories 'sustainable' and 'transition' – or on sustainability indicators, or both. The system should help consumers understand products' purposes. The Opinion also covers appropriate disclosures for products outside the new categories, improvements to the definition of sustainable investments, simplification of the way disclosures are presented to investors, other technical suggestions, and the need to conduct consumer testing before putting forward any policy proposals to review the SFDR.
  
  

EBA

• On 6 June 2024, the EBA published three documents to further detail the obligations under the Markets in Crypto-Assets Regulation (MiCAR).
• On 13 June 2024, the EBA published the package of technical standards and guidelines under MiCAR on prudential topics including equity, liquidity requirements and recovery plans. This package is part of the EBA's ongoing efforts to promote a well-regulated market for asset-referenced tokens and e-money tokens in the EU.
• On 19 June 2024, the EBA published the package of technical standards and guidelines under MiCAR on the topics of reporting, liquidity stress testing and supervisory colleges. This package completes the delivery of EBA technical standards under MiCAR.
  
  

ESMA

• On 12 June 2024, ESMA published a newsletter on a number of interesting topics. The overarching theme is 'Building more effective and attractive EU capital markets'. The newsletter covers guidance for investment firms using AI in their services to consumers, guidance for funds on the use of environmental, social and governance (ESG) or sustainability-related terms in their names, rules on conflicts of interest for crypto-asset service providers under MiCAR and marketing disclosure rules under MiFID II.
  
  

The Dutch government

• On 7 June 2024, the government launched a consultation (in Dutch only) on a new International Sanctions Act to replace the Sanctions Act 1977. The proposal consists of a number of sections, including new administrative enforcement powers in addition to criminal law and improved bases for information exchange, a central reporting point for sanctions notifications, the ability to add notes in certain public registers about a relationship with sanctioned persons or entities, the extension of current administrative supervision to the legal profession, and a regime for the management and administration of certain (long-term) frozen assets and economic resources. The consultation will close on 8 August 2024.