"Various technological advancements are enhancing retail investors’ access to financial products and services. These developments bring an increasing number of retail investors to capital markets through online offerings and, in some cases, on a cross-border basis. Recent developments related to online marketing and distribution, new online targeting techniques and the application of behavioural knowledge, accompanied by increased retail participation, have resulted in an escalation of innovative, but at times also harmful or even fraudulent online activity”. - IOSCO, 2022.
The Consultation Report highlighted how technological advancement in financial services has resulted in numerous changes, positive and some adverse, including:
- Increased access to financial services and products
- Reduction in search cost
- Flexibility, convenience, price and quality comparison.
Equally positive for financial institutions, digitalisation has enabled:
- Demographic or geographic targeting
- Increased outreach, resulting in greater sales and economies of scale
- Time-effective marketing
- Multiple low-cost and efficient marketing options
However, the potential risks for financial consumers, firms, and regulators of online marketing includes potential exploitation of data, investor biases, programmatic advertising (algorithmic manipulation) gamification and behavioural techniques which may distort information such that investors take emotional decisions instead of informed financial decisions, the latter being a component of consumer harm mitigation of numerous regulatory agencies. In the absence of appropriate supervisory and enforcement tools, markets and investors may be exposed to vulnerabilities and risk of consumer harm.
The four main factors highlighted by IOSCO members that increase challenges in supervision of online marketing and distribution were identified as follows:
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Lack of visibility |
Detecting the existence of the activity in an online environment is the greatest regulatory challenge
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Overload of information
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Monitoring and supervising the volume of information
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Continuously changing information |
Online marketing is more versatile than traditional channels, such as radio, tv and print. Online information can be forwarded and copied, increasing the potential target market compared to the traditional advertisement channels.
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Cross-border challenges |
Home v Host state regulatory issues of cross-border marketing. Some jurisdictions have set their regulatory perimeter to only require firms that market, offer or sell the products to residents of that jurisdiction to be licensed. Firms that offer the relevant products to non-residents may not be required to be regulated, and of course a borderless online platform enables manipulation of reverse solicitation to potentially arbitrage regulatory marketing and distribution requirements.
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IOSCO further set forth recommended measures for consideration by IOSCO members and financial institutions to address this new and evolving challenge, summarized as follows:
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Measure 1: Online Marketing and Distribution |
Rules for online marketing and distribution IOSCO members should consider requiring that firms have proper internal rules, policies, processes and tools for their online marketing and distribution, and review them on a regular basis.
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Measure 2: Online onboarding |
Rules for online onboarding IOSCO members should consider requiring that firms apply appropriate filtering mechanisms, policies and procedures for financial consumer onboarding in line with the laws and regulations of the firms’ jurisdiction, the financial consumers’ jurisdiction, and the jurisdiction where the products or services are being marketed or distributed. Such information provided should be clear, fair and non-misleading.
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Measure 3: Responsibility for online marketing |
Responsibility for online marketing IOSCO members should require, subject to a jurisdiction’s laws and regulations, that management assumes responsibility for the accuracy of the information provided to potential investors on behalf of the firm, including those provided via various social media channels, including influencers, and the timely disclosure of necessary information regarding potential risks and conflicts of interest to avoid potential financial consumer harm. |
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Measure 4: Capacity for surveillance and supervision |
IOSCO members should consider whether they have the necessary powers and have adequate supervisory capacity to oversee an increasing volume of online marketing and distribution activity. IOSCO members should also consider ways to develop appropriate monitoring programs for the surveillance of online marketing and distribution activities, including on social media.
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Measure 5: Staff qualification and/or licensing requirements for online marketing |
IOSCO members should consider requiring that firms assess the necessary qualifications for digital marketing staff. IOSCO members may also consider requiring firms to have specific staff qualification and/or licensing requirements for online marketing staff, similar to licensing requirements for sales staff, if such regulatory requirements do not already exist or apply to online marketing staff.
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Measure 6: Ensuring compliance with third country regulations |
Where firms may have clients from jurisdictions other than where they hold a license, the firm’s home regulator should consider requiring their domestic firms to have adequate policies and procedures for onboarding these clients. For example, IOSCO members could require firms to undertake due diligence to determine whether they are required to hold a license in a prospective client’s home country and/or whether other regulatory obligations apply, and to retain records of such due diligence.
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Measure 7: Clarity about legal entities using internet domains |
IOSCO members should consider requiring firms, when they offer products through multiple internet domains, to adopt policies and procedures requiring clear, fair and not misleading disclosure about who the underlying legal entity is offering the product and under what license (and from which jurisdiction). This disclosure should also cover the scope and limitation of services. IOSCO members should also consider prohibiting firms from redirecting clients to a third country website to avoid the regulatory requirements in a jurisdiction.
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In addition to supervisory tools and measures as set out above, IOSCO members must also have effective surveillance and enforcement tools, facilitated through open communication across IOSCO members.
‘Borderless marketing’ will continue to evolve and accelerate in parallel with the increasing digitalisation of financial services. This presents challenges to firms in keeping up to date with regulatory developments across multiple jurisdictions, and for regulators, be able to monitor and ‘police’ the perimeter will continue to become increasing more difficult without appropriate technologically aligned supervisory technology tools.
The consultation period closes on 17th March 2022
