Who gives the ESMA risk rating?

Brendan Burgess

Brendan Burgess

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This was referred to in this post: Greenman Retail Series 4


From Friends First website:

European Securities and Markets Authority (ESMA) Risk Scale
The ESMA risk scale has its origin in European Union (EU) legislation in relation to Undertakings for Collective Investment in Transferable Securities Key Investor Information Documents (UCITS KIIDs). The ESMA Risk Rating methodology uses a seven point scale based on 5-year annualised volatility ranging from band 1 (annualised volatility between 0% and 0.5%) to band 7 (annualised volatility above 25%).


This is what Greenman says

Greenman’s Retail Series 4 offers the opportunity of an excellent yield each year and an anticipated annualised return over 5 years of 8%. An interesting low to medium risk (ESMA risk rated 3) investment.

Then you see that it is being sold by:

Steadfast Financial Consulting Ltd. is regulated by the Central Bank of Ireland

It's easy to see how people could invest in this expecting a return of 8% with low to medium risk.

Brendan

 
It sounds very like the situation in the UK at the moment where London Capital and Finance has crashed. They were a regulated entity which sol mini-bonds which were not regulated. It now looks as if the investors will get back about 20% of their investment.

People who invested in LCF did so because it was regulated and because they were told that the returns would be better than deposits.

The company also prominently advertised its FCA authorisation, but its mini-bond products were not overseen by the regulator nor were they covered under the Financial Services Compensation Scheme.



Brendan
 
A problem with ESMA is it is based on volatility of the previous 5 years. When markets have been relatively calm in that period, asset classes such as equities or property can have a lower rating. If things go haywire in the markets, the exact same asset class will be given a higher rating. They have struggled to even find anything to fit into rating 7 in recent times.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
SBarrett said:
A problem with ESMA is it is based on volatility of the previous 5 years. When markets have been relatively calm in that period, asset classes such as equities or property can have a lower rating. If things go haywire in the markets, the exact same asset class will be given a higher rating. They have struggled to even find anything to fit into rating 7 in recent times.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
Click to expand...


Very good point - not just because the period used is 5 years, but also because if and when things "go haywire", the ESMA ratings won't be adjusted until after the horse as bolted.

Offering ratings based on say 5, 10 & 20 year periods would be more useful, so people could see if the ratings had shifted much across the three periods. Granted, it doesn't solve the issue of how to reflect the current, rather than historic, risk level.
 
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