[Newsflash n. 7]

 

On 9 May 2016, CONSOB launched three public consultations concerning the retail distribution of financial products under different perspectives: (a) conduct of business under MiFID, (b) mitigation of liquidity risk, (c) disclosure under PD. These initiatives have been highlighted also by CONSOB chairman as a further attempt to strengthen investors protection, also in light of the recent events affecting the Italian banking system (the bail-in of four banks).

  • Guidelines on key information to be provided in case of public distribution

[Conduct of business under MiFID]

The recommendation under consultation aims to provide operating indications on how to perform more efficiently the disclosure obligation that apply to intermediaries when providing investment services, including placement of securities, to retail clients.

If the issuer and distributor are different entity (i.e. except in case of self-placement by the issuer), CONSOB highlights that it is a duty of the distributor to obtain the necessary information to provide the required disclosure to the clients, also by entering into specific agreements with the issuer, notwithstanding the issuer’s responsibility for the information that it publishes. If the intermediary cannot obtain sufficient information to adequately evaluate the main characteristics and risks of the financial product, the intermediary shall refrain from selling and giving advice about it.

The document sets out:

  • the general criteria for providing a clear, concise and immediate information to retail customers (correctness, comprehensibility, summary, objectivity, coherence, updating, proportionality, involved of the company audit departments);
  • the key information to be provided on the financial product (terms; risks; price and costs; possible yields, with evidence of the pay-off structure and the extent to which the risk of total or partial loss of the capital invested exists).

It should be noted that, even if only as a suggestion, CONSOB encourages the possibility to summarize the above information in a product sheet (“Scheda Prodotto”) to be delivered to the clients before entering into the transaction.

This initiative of the Regulator is a further step following a number of actions taken at national level (Communication on Illiquid products, Communication on complex products, Communication on disclosure taking account implementation of BRRD) and international level (ESMA Opinions on complex products and product governance, MiFID2 and PRIPS). At this initial stage, some material practical impacts may be envisaged with regard to the relationship between issuer and distributor (considering the potential increase of exchange of information) and the burden on the intermediaries (should they produce a Scheda Prodotto in any circumstance and not only in case of illiquid products).

  • Distribution of financial instruments through multilateral trading facilities

[Mitigation of liquidity risk]

Through this consultation, CONSOB stresses out the importance of putting in place solutions capable of ensuring that the distribution of the financial instruments (CONSOB specifies that distribution includes both primary and secondary market) satisfies appropriate levels of transparency and efficiency, which can mitigate the risk that the business conduct of intermediaries are not in line with the best interest of the clients.

In particular, when the intermediary (being it the issuer or distributor) intends to sell financial products embedding a high liquidity risk to retail clients, it should put in place certain arrangements (relating to price, costs and timing) in order to ensure the possibility for the investor to exit from its investment.

To this end, CONSOB recommends intermediaries to consider the direct distribution through multilateral trading sites (regulated markets or MTFs), following the example of the direct distribution through Borsa Italiana (so called “OPV”). In this respect, the management company of MTFs are recommended to eliminate potential barriers to the direct distribution through their platforms.

In addition, during the primary market phase, the intermediaries are recommended to distinguish the remuneration of distributors from the price of the instrument, so that investors who subscribe the financial instrument directly on the multilateral trading facility without availing themselves of the distribution service, do not have to pay for it.

The potential impact of the recommendation as proposed at this stage seems quite significant, considering that if an intermediary decides not to use a multilateral trading facility, it shall promptly assess, under its own responsibility, whether the distribution process followed meets adequate conditions of transparency and efficiency and it shall provide CONSOB with:

  • A precise description of the distribution model and its capability to ensure the liquidity of the investment made by the client;
  • Information about other solutions to provide liquidity: systematic internalisers, cross trades or other divestment strategies put in place by the intermediary itself (in which case a detailed description of the system operation must be also provided).

CONSOB specifies that the determinations taken by the intermediaries in connection with this recommendation will be taken into account by the Regulator in order to direct its supervisory actions.

Intermediaries will have to make their decisions as to whether comply or not with the Recommendation as soon as possible and no later than six months as from the adoption of the Recommendation, notifying CONSOB as part of the duty of periodic communications applicable to intermediaries under the supervision of the Regulator.

  • Guidelines on the “warning for the investor” in prospectuses

[Disclosure under PD]

This consultation is intended to learn the market’s view about the standardization and improvement of a paragraph “warning for the investor” that is frequently included in prospectuses for the public offering or admission to listing of financial products.

Although such warning is not currently envisaged by the applicable regulation at EU and national level, CONSOB believes that it may increase the awareness of retail investors about the potential risks associated with the relevant investment.

To this end, such introductory paragraph – to be inserted on the first page after the cover page – should provide information on particularly critical situations that could be relevant in connection with the issuer, the distribution/admission to trading, the terms of the financial instrument through clear, immediate, easy-to-understand and consistent language.

In addition, CONSOB specifies that the “warning for the investor” should not represent a mere selective duplication of the information disclosed in the risk factor section of the prospectus.

The draft recommendation clarifies the goal of the paragraph, sets out the criteria for its accurate drafting (both in terms of content and format), and provides a non-exhaustive list of circumstances requiring immediate, clear and prompt warning of the associated risks.

Clearly the Recommendation does not affect the application of the existing regulation governing the publication of prospectuses for public offering and admission to listing.

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Responses to the each of the three consultations may be submitted until 8 June 2016.

We would be pleased to assist you, should you wish to comment on any of the consultation papers or need any further clarification in relation thereto.

The consultation papers (in Italian language only) can be found at the following links:

 

Contacts:

Vito Vittore
Senior Partner

Elena Pagnoni
Of counsel

Luigi Bonifacio
Associate