On 22 December 2014 the Italian Securities and Exchange Authority (Commissione Nazionale per le Società e la Borsa) (“Consob”) published a communication concerning the distribution by intermediaries of complex financial products to retail customers (i.e. Communication No. 0097996/2014) (the “Communication”).
The aim of the Communication is to increase the level of protection of retail customers, who are deemed to be the most vulnerable operators in the complex financial products market.
Indeed, in Consob’s view, the complexity of the financial products means that retail customers are exposed to higher risks and require constant monitoring to ensure that these customers are not exploited due to their lack of market experience.
Consob, in the past, has observed that the transparency requirements imposed by current regulations are insufficient in ensuring full investor protection and preventing distortions in the placement process of the relevant products.
In the Communication, Consob has adopted a non-exhaustive list of complex financial products and has established good practices to which the intermediaries are subject to in their relationship with retail customers.
The rules set out in the Communication build on the existing rules of conduct that intermediaries must apply in providing investment services in Italy, found in Italian laws and MiFID implementing regulations. Such rules of conduct apply, inter alia, to EU intermediaries subject to establishment regime (i.e. having a branch in Italy). Conversely, those rules do not apply to EU intermediaries providing services into Italy which must comply with the laws and regulations of their home State.
The Communication follows two European Securities and Markets Authority (“ESMA”) opinions concerning “MiFID practices for firms selling complex products” published on 7 February 2014 and “Good practices for product governance arrangements” published on 27 March 2014.
Specifically, ESMA identifies complex products and recommends that intermediaries adopt good practices when offering these products, to ensure they are in line with the target clients’ profiles and to avoid damaging effects on retail customers.
In the Communication, Consob fully adopt ESMA’s position. In particular, the Italian Authority:
a) explicitly advises intermediaries against offering complex financial products indicated in a specific non exhaustive list to retail customers. The list includes:
- financial products arising from securitisation transactions (i.e. Asset Backed Securities);
- financial instruments convertible into shares, upon initiative of the issuer or subject to certain conditions (e.g. Contingent Convertible Notes or financial products qualified as “additional tier 1” under Art. 52 of Regulation (UE) n. 575/2013);
- credit-linked financial instruments;
- structured financial instruments not traded on trading venues, in relation to which the reimbursement of the sums paid by the investor is not guaranteed;
- derivative financial instruments; and
- alternative undertakings for collective investment (“UCIs“).
b) reminds intermediaries of their duty to apply criteria of coherence between the products offered and the customers’ profiles;
c) reminds intermediaries of their duty to prevent conflicts of interest that can occur in the distribution of complex financial products aimed at increasing the assets of the intermediaries themselves;
d) invites intermediaries to eliminate incentives to personnel which could accentuate conflicts of interest of the seller; and
e) invites intermediaries to make use of the same assessment and simulation methods used for internal purposes within their risk management system, when preparing the information to be provided to retail customers during the distribution process.
Where the intermediaries decide not to comply with the Consob’s advice in a) because they deem that the distribution of complex products is in the interest of the retail customers and that adequate information concerning such products and risks connected with them are provided to investors, other measures, in addition to the measures described in b) to e) above, are prescribed aimed at making the distribution compliant with the above mentioned principles.
The relevant decision to distribute the financial products must be taken, on a justified basis, by the top management of the intermediaries, subject to opinions of the controlling corporate bodies and functions.
In any case, the decision to distribute the products should be accompanied by identification of the relevant investment limits for current and potential customers, taking into account:
- the customers’ socio-economic characteristics (e.g. level of expertise, age, minimum assets held by the intermediary );
- the relevant quantitative thresholds (e.g. minimum investment thresholds and maximum thresholds of the assets portfolio);
- the modalities of the offer (e.g. online channel only application; advanced portfolio advisory service which also includes (i) periodically monitoring of financial portfolio, (ii) review of the adequacy, (iii) interaction with the customer after aforesaid review; etc.).
Moreover, the intermediaries must submit to the client a disclosure concerning the “unsuitability” for retail customers of the distributed products, according to Supervisory Authority guidelines.
The intermediaries shall carry out specific controls during the entire process of distribution of complex financial products, to ensure the compliance of this process with the aforesaid principles on a continuous basis.
Consob has established that intermediaries must implement the Communication as soon as possible and in any event no later than 30 June 2015, informing the Authority of decisions and measures adopted.