CONSOB: Q&As on the application of the communication on distribution of complex financial products to retail investors issued by CONSOB on 22 December 2014

The Italian Securities and Exchange Commission (CONSOB) published a Questions & Answers paper (Q&As) on the application of the Communication No. 0097996/14 published by the same Authority of 22 December 2014.

On 23 June 2015, the Italian Securities and Exchange Commission (CONSOB) published a Questions & Answers paper (Q&As) on the application of the Communication No. 0097996/14 of 22 December 2014 "the Communication" for intermediaries active in the distribution of complex financial products to retail investors.

The purpose of the Q&As is to provide the intermediaries with clarifications on some specific topics of the Communication, and, in particular, on:

(i)  the scope of application of the Communication

(ii)  the internal measures recommended to the intermediaries

(iii) the list of products of “high complexity”, and

(iv) the obligations of the intermediaries.

The 22 December Communication: recap

The Communication follows two European Securities and Markets Authority (ESMA) opinions concerning “MiFID practices for firms selling complex products” published on 07 February 2014 and “Good practices for product governance arrangements” published on 27 March 2014. In such opinions ESMA identified the practices to be observed by investment firms when selling complex financial products and a non-exhaustive examples of good practices illustrating arrangements that firms could put in place to improve their ability to deliver on investor protection regarding, in particular:

(i) the complexity of the products they manufacture or distribute

(ii) the nature and range of the investment services and activities undertaken in the course of that business, and

(iii) the type of investors they target.

In the Communication, which basically reflects the principles set out in the above ESMA opinions, CONSOB:

(i)  recommends to intermediaries not to offer to retail investors complex financial products indicated in a specific list, including, but not limited to, asset backed securities, instruments convertible at the discretion of the issuer, credit-linked instruments, derivative financial instruments and structured financial products

(ii)  reminds intermediaries that they must verify the coherence between the products offered and the investors' profile

(iii) reminds intermediaries to prevent conflicts of interest which may occur in the distribution of complex financial products to retail investors and, for such purpose, recommends to remove incentives that can emphasize the sale of such products in a situation of a potential conflict of interest, and

(iv) invites intermediaries to use the same assessment and simulation methods that are used for internal purposes to manage risks.

If the intermediaries decide not to comply with CONSOB’s recommendation outlined in (i) because they deem that the distribution of a specific complex product is in the interest of the retail customers and that adequate information concerning such product and relevant risks are provided to investors, other measures, in addition to the measures described in (ii) to (iv) above, should be adopted to make the distribution compliant with the above mentioned principles.

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 provided that intermediaries must decide about the areas of the Communication to be implemented as soon as possible and in any event no later than 30 June 2015, informing the Authority of decisions and measures adopted.

Guidelines for intermediaries: the Q&As

With reference to the scope of the Communication, CONSOB clarifies that the Communication applies to:

  • retail clients - as per the MiFID definition, although intermediaries may apply the same measures vis-à-vis professional clients
  • transactions carried out at client’s initiative either on primary or secondary markets
  • all complex products issued or marketed after 30 June 2015
  • portfolio management.

The Q&As clarify that the Communication doesn’t apply to divestment operations and to asset management companies providing collective management services.

With reference to the internal measures recommended by the Communication, CONSOB, first of all, clarifies that the internal process of mapping the products is under the discretion and the responsibility of each intermediary. The Q&As also indicate when and where intermediaries must inform clients that some products are to be considered unsuitable for retail customers and how they must inform clients on investment transactions in complex products carried out in the context of portfolio management services. CONSOB also clarifies that intermediaries should avoid remuneration arrangements which make particularly profitable the sale of complex products.

In relation to the list of products provided by the Communication, CONSOB states that if a product falls within more than one of the categories of products included in the list, it will have to be considered as falling under the category which results in the application of the regime applicable to the “most complex” product. The Q&As provide further clarifications on the following specific issues:

  • what is the meaning of “trading venues” for the purpose of in the Communication
  • which collective investment schemes fall within the category of products with a leverage greater than one
  • if products purchased by recurring to financing granted by the intermediary, in the context of the provision of the ancillary service of granting credits/loans, qualify as products with a leverage greater than one
  • if some products - such as asset backed securities issued by securitisation vehicles having as underlying liquid financial instruments with a maximum maturity of ten years, credit-linked products, covered warrants, certificates, hedging derivatives contracts, ETF, subordinated bonds, perpetual bonds - must be included in the list of “complex products” indicated in the Communication.

With reference to the obligations that intermediaries are required to comply with, the Q&As specify that they must decide methods for implementing the Communication by 30 June 2015 and must inform CONSOB about their decisions in the ordinary report that the internal compliance function has to issue within 30 days from the approval of the 2014 annual financial statement or, if the decisions have been taken after the transmission of the above report, in the periodic report relating to the provision of investment services and activities (such report to be transmitted to CONSOB within 30 days from the adoption of the same decisions).

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.