On 25 May 2023, the European Securities and Markets Authority (ESMA) issued a public statement warning investors about the risks associated with investment firms offering both regulated and unregulated products and services. ESMA emphasises that retail investors often rely on the reputation of an investment firm, which may in turn lead them to overlook the potential risks of unregulated products and services, known as the "halo effect". More specifically, such an overlook commonly occurs when unregulated products have a similar purpose to regulated financial instruments governed by MiFID II.

Examples of such products and services that, in some jurisdictions, fall outside the scope of financial services regulation, include crypto assets, real estate, gold, raw materials, certain non-transferable securities (for example non-transferable loan notes). Specifically on crypto assets, while the Markets in Crypto-Assets Regulation (MiCA) is close to adoption, crypto assets offered by investment firms will continue to be unregulated in many EU jurisdictions until MiCA applies.

Such risks include a misunderstanding of the protections offered to the investors in respect to unregulated products and services, on the basis that the applicable protection of regulated products does not apply to the unregulated ones. In turn, there is a risk that investors are not fully aware of the nature of the product and the risks which could potentially lead to confusion between regulated and unregulated products.

ESMA's statement aims to remind investment firms of the expected behaviours in such situations, including proper disclosure and appropriate documentation. The goal is to ensure that investors are fully aware of the unregulated status of these products and services and understand that they may not receive the same regulatory protections as investments in regulated products.

Furthermore, ESMA recommends that investment firms consider the impact of their unregulated activities on their overall business activity and incorporate this into their risk management systems and policies.

ESMA’s press release can be found here and the statement can be found here.