Risks are part of any investment process, and for this reason, investment disclaimers and risk warnings exist to protect both buyers and sellers. While risk warnings help investors understand possible reasons why an investment’s outcome might suffer losses, investment disclaimers ensure that the material, research or investment advice discloses potential conflicts of interest. Depending on the type of financial document (KIID document, fact sheet, client presentation, brochure, …) disclaimers and warnings might appear as footnotes or as statements on the last page of materials.
Before sending any type of marketing material that promotes a financial product or service to a client, relationship managers must ensure that every document is compliant with each client scenario. But knowing what to display in each document isn’t so straightforward. There are rules that outline how financial institutions are allowed to market their products and services to their clients and prospects. Depending on the material type, what is being promoted and which licenses the company possesses, the regulations might change and demand different types of warnings and disclaimers. When servicing clients across jurisdictions it becomes even more complicated as every country has its own regulations.
Which regulations outline the requirements for investment disclaimers and risk warnings?
Even though each country has its own regulation when it comes to promoting financial products and services, some economic blocks have shared regulations, such as the European Union – one of the most regulated environments in the world. Learn more about the main regulations and directives in the region:
Undertakings for Collective Investment in Transferable Securities (UCITS): UCITS is a directive that regulates the sale of mutual funds which are managed and domiciled in countries from the European Union, and are intended to be sold to retail clients.
Alternative Investment Fund Managers Directive (AIFMD): The primary goal of the AIFMD is to protect investors as well as reduce some of the systemic risks that alternative investment funds can pose to the EU and its economy.
Markets in Financial Instruments Directive II (MiFID II): MiFID II is a European regulation that standardizes financial market practices across the European Union by enhancing the investor protection and defining standardized regulatory disclosure requirements for financial products.
Prospectus Regulation: The Prospectus Regulation streamlines how companies should publish prospectus when their securities are admitted to trading on regulated markets.
Which types of risk warnings are mostly required by regulations?
Financial product returns are not guaranteed and different factors might influence undesired losses. Therefore, investors should be warned not only about the benefits of investments but also about their risks. Different factors can be considered as a risk for a financial product or service, from political instability to process inefficiency. Discover a few of the most common risks that might affect financial markets:
Issuer risk: an issuer risk refers to the risk of incurring losses due to changes in the financial condition of the issuers, meaning that there is a risk that the security will default.
Market risk: a market risk indicates the possibility of experiencing losses due to movements in the market, like prices, rates and volatility.
Liquidity risk: a liquidity risk occurs when an investment lacks marketability and doesn’t convert into cash without incurring losses.
Foreign exchange risk: a foreign exchange risk refers to possible losses due to uncertainty of future currency exchange rates.
Sustainability risk: a sustainability risk takes place when there is a financial impact due to practices that impact the environment and people.
Operational risk: an operational risk occurs when an investment’s returns suffer losses as a consequence of failed internal processes, systems and people.
Political risk: a political risk occurs as a result of instability or changes in the political scenario of a country.
Counterparty risk: a counterparty risk refers to the possibility that the counterparty involved in the transaction might default on the contractual obligations.
Are there general rules for investment disclaimers and risk warnings in financial documents?
Even though every country has its own regulatory requirements, there are still some shared rules that apply to most countries, such as:
Clarity: the information on disclaimers, footnotes and risk warnings must be clear, fair and not misleading. There is no room for unrealistic impressions of products and services.
Language consistency: whenever a document is written in a specific language, disclaimers and warnings should be in the same language.
Font size: most countries demand a minimum font size to be used in warnings and disclaimers to ensure their readability.
Consistency between documents: the information provided in the marketing material must match legally binding documents. It’s mandatory that the terms are the same and any other detail such as product name is stated correctly.
Client identification data: clients are not supposed to be identifiable in any marketing material. Therefore clients’ logos and names must stay out of the materials.
Third-party content: whenever third-party content is used or reproduced, it should be referred to in the document. This rule applies to statistics, graphs, charts, quotes or any other data.
Those are just a few examples of regulatory requirements, but there are plenty of others that financial institutions need to meet in order to stay compliant.
How do financial organizations manage to create and review disclaimers and warnings for each client scenario?
In most financial institutions, regulatory requirements are maintained by compliance teams in extensive spreadsheets, PDF handbooks or online policies. Hence whenever relationship managers need to create custom financial documents to share with clients, it results in lots of back-and-forth emails with compliance officers in order to get approvals. Besides being time-consuming and prone to human error, this process might frustrate both relationship managers and clients due to long wait times.
Another approach used by organizations is using boilerplate presentations, ready to share with clients in specific scenarios. Even though this process is faster, it lacks personalisation and consequently might not meet the client’s expectations and provide an unpleasant experience.
Are there digital tools that help speed up the process of getting compliant investment disclaimers and risk warnings on financial documents?
Fortunately, Apiax has developed a digital compliance solution that automatically provides verified disclaimers, footnotes and risk warnings right inside financial documents. All it requires relationship managers to do is provide information on the client scenario, e.g. material type and domicile country, to get disclaimers and risk warnings embedded into any document. The solution also provides a custom checklist indicating all the regulatory requirements that need to be met.
Thanks to embedded compliance, an API connects Apiax’s rule engine system with any tool or system, from content creation platforms to CRMs. Depending on the information provided for the client scenario, different footnotes and disclaimers are automatically compiled and placed into marketing materials. The rules behind this technology can either be maintained by financial institutions’ compliance teams or by Apiax’s content providers – leading law firms from around the globe.
