Unnecessary complex structured products
Regulatory Radar newsflash
On 20 June 2011, the FSMA launched its initiatives on “unnecessary complex structured products”. Following the financial crisis and based on the law of 2 July 2010, the FSMA has announced a set of measures to enhance product transparency and simplicity.
Three milestones have been defined: A standstill (moratorium) for unnecessary complex structured products, a consultation period followed by a regulation.
Standstill for unnecessary complex structured products
As of 1 August 2011, distributors can voluntarily subscribe to a standstill on unnecessary complex structured products. By doing so they will refrain to commercialise unnecessary complex structured products intended for retail clients. The participating distributors will be included in a list accessible via the FSMA website. The moratorium looks to the future and applies only to products put on the market after the moratorium has come into effect.
Distributors can choose not to apply the standstill for “private banking clients” (defined as clients that hold a minimum of 500.000 EUR at an institution).
Structured products are all products that hold a derivative component, irrespective of their wrapping (fund, insurance contract or note).
To determine whether or not a structured product is unnecessary complex, the FSMA applies 4 criteria:
- Is the underlying security fully accessible?
- Is the investment strategy not overly complex?
- Is the yield not determined by more than 3 mechanisms?
- Is full transparency regarding costs, credit risk and market value offered?
With the standstill, the FSMA wants to ensure a serene climate during the consultation period on future regulation.
Consultation period followed by a regulation
The moratorium will continue until the FSMA has issued a new regulation on the sale of structured products to retail investors.
The new regulation will be drafted following a consultation period, in which interested parties will have the opportunity to express their views on the subject.
The consultation will begin before the summer. It is the intention to present the new regulation by the end of 2011.
Distributors/manufacturers will need to consider the moratorium and examine the characteristics of the structured products that they offer applying the FSMA criteria.
Firms will, in general, need to consider the impact of the moratorium and future regulation on their product range and on compliance policies and procedures such as product approval procedures.
Should you be interested to have a conversation with us to discuss approaches on dealing with the complex products FSMA initiatives, please feel free to contact one of our team leaders.