The European Securities and Markets Authority (Esma) has sought to calm investor protection concerns raised by derivatives on fractions of shares.
The regulator has published new guidance to clarify firms’ requirements when marketing and selling fractional shares to retail clients.
Fractional shares are a portion of a stock that is less than one full share and which are available at a smaller purchase price. Active marketing and sale of fractional shares by firms to retail clients have gained momentum.
Esma’s statement highlighted that derivatives on fractions of shares are not corporate shares, so firms should not use the term ‘fractional shares’ when referring to these instruments. This will prevent clients from believing they are being offered a fraction of a corporate share.
Esma has declared any use of this term is misleading and in breach of MiFID II requirements, which were introduced to standardise practices and improve protections for investors.
Among other measures are that firms should also make clear to the investor that they are buying a derivative instrument to enable clients to understand the nature and risks of derivatives.
Esma also determined that an appropriateness assessment must be completed where non-advised services are provided due to the complex nature of derivatives.
The statement added: “As derivatives, these instruments are complex products under the product governance rules. Consequently, the target market for these instruments needs to be identified in more detail considering, inter alia, counterparty and liquidity risks.”
© 2023 funds europe