Don’t assume clients understand inflation risk

With elevated inflation looming over the global economy and preoccupying the world’s central bankers, the European Securities and Markets Authority (ESMA) is calling on the investment industry to heed its impact on retail investors.

The European Union’s securities regulator issued a statement reminding industry firms to incorporate inflation and inflation risk into their work for retail clients, particularly when applying suitability, disclosure and other investor protection requirements.

High inflation represents a particular risk for retail investors, ESMA said, “as some of them will not fully appreciate the link between inflation and financial markets and may not fully understand how considerations on inflation should be factored in when they make saving and investment decisions.”

As a result, it called on industry firms to consider both inflation and inflation risk when providing advice to clients, and in the manufacturing and distribution of investment products.

For instance, it said firms must ensure that the information provided to retail clients sets out the possible impact of inflation on investment values and returns.

Similarly, it said that ESMA expects firms “to carefully consider, as part of the assessment of market risk and credit risk, the risk that inflation will undermine the performance and/or the value of an investment” as part of their suitability assessments.

“In this respect it is particularly important that firms carefully assess and understand clients’ investment horizons,” it said.

ESMA also said it expects product manufacturers and distributors to consider the effects of inflation as part of their product governance processes.

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