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ANNUAL CONFERENCE FOR IN-HOUSE LAWYERS
Information and advise duties: How to tackle “misselling”?
By Antoine MAFFEI and Ferheen MAHOMED
Information and advise duties: How to tackle « misselling » ? 2
Summary
INFORMATION AND ADVISE DUTIES: HOW TO TACKLE MISSELLING ?
Information and advise requirements under the Markets in Financial Instruments Directive (MiFID) and an Asian perspective 3 categories of investors under the MiFID The scope of the information and advise duties of investment services providers under the
MiFID depends on the category to which the investors belong to An Asian perspective
Structured loans entered into between local authorities and credit institutions The Charter of conduct of business between local authorities (collectivités locales) and credit
institutions (the GISSLER Charter) Are structured loans entered into between local authorities and credit institutions financial
instruments in the sense of the MiFID?
The Packaged Retail Investment Products (PRIPs) Main features of PRIPs Are PRIPs financial instruments in the sense of the MiFID?
A French approach under consideration: the Deletré Report 2 Scope of the Deletré Report 2: all financial, banking and insurance products Main recommendations under the Deletré Report 2
Conclusion
Information and advise duties: How to tackle « misselling » ? 3
The classification of investors under the MiFID
INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND
AN ASIAN PERSPECTIVE
Introduction of 3 categories of investors: Non professional clients (clients non professionnels or clients de détail) Professional clients (clients professionnels) Eligible counterparties (contreparties éligibles)
(Annex II of the MiFID / Articles D. 533-11 to D. 533-14 of the CMF)
Purpose: drawing up of different levels of requirements in terms of information and advise (applicable to investment services providers) which will depend on the category to which the investors belong to
Information and advise duties: How to tackle « misselling » ? 4
Scope of the information and advise requirements applicable to investment services providers under the MiFID
INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND
AN ASIAN PERSPECTIVE
Any Information addressed by investment services providers to investors must be: fair clear not misleading
(Article 19.2 of the MiFID / Article L. 533-12 CMF)
Information requirements applicable prior to and after the provision of investment services
(Article 19 of the MiFID)
Information and advise duties: How to tackle « misselling » ? 5
Scope of the information and advise requirements applicable to investment services providers under the MiFID
INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND
AN ASIAN PERSPECTIVE
1. Non professional clients Definition: clients which are not professional (Article 4 of the MiFID) Reinforced information and advise requirements applicable to the investment services
providers
2. Professional clients List of professional clients: in Annex II of the MiFID implemented under French law by Article
D. 533-11 of the CMF Attenuated information and advise requirements applicable to investment services providers
3. Eligible counterparties List of eligible counterparties: in Article D. 533-13 of the CMF Information and advise requirements do not apply to investment services providers in respect
of eligible counterparties
Information and advise duties: How to tackle « misselling » ? 6
An Asian perspective
Background to enhanced regulatory regime to prevent misselling in Asia Lehman minibond to retail investors in Hong Kong and Singapore
Minibond complaints
INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND
AN ASIAN PERSPECTIVE
Information and advise duties: How to tackle « misselling » ? 7
An Asian perspective
What was sold and how it was sold
• Purely on credit rating – misselling at its worst
Legislation enquiries
• Interrogation by politcians in open forum of regulators and distributing banks
Compensation by distributing banks
• 100% to senior citizens and illiterate investors, 60% to the remaining investors
INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND
AN ASIAN PERSPECTIVE
Information and advise duties: How to tackle « misselling » ? 8
An Asian perspective
Resulting in enhanced regulatory regime in the region Hong Kong - Undertakings
We, __________________, the Arranger appointed by the Issuer in relation to the issue of the Product :
• confirm that we have conducted reasonable due diligence on the issuer, the guarantor and any other counterparty (where applicable), and the Product and the Offer Documents to ensure that :– the issuer will be able to comply with all laws, codes and guidelines applicable thereto; – the product is appropriate for distribution to the public taking into account the nature of the Product and the nature of
the persons likely to consider acquiring them.
Product providers are to be required to confirm that a structured product is designed fairly and is appropriate for the market(s) for which it is intended.
INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND
AN ASIAN PERSPECTIVE
Information and advise duties: How to tackle « misselling » ? 9
An Asian perspectiveThe importance of assessing suitability
The key obligation that relates to the risk of misselling is the need for banks and firms to ensure that products are suitable for their clients.
This means banks and firms must know their client’s financial situation, investment experience and investment objectives (General Principle 4) and, having regard to that information, “..when making a recommendation or solicitation, ensure the suitability of the recommendation or solicitation for that client is reasonable in all the circumstances” (Para 5.2).
This is the cornerstone obligation for banks and firms engaged in the sale of financial products.
Let me be clear about the requirement of suitability. It does not mean banks and firms must make sure the client has received a copy of the prospectus, or that the client has been given a list of risks attached to the product or signed a form that says they have read the prospectus. These things might be relevant but they do not by themselves satisfy the requirement of suitability.
The onus is on the bank or the firm to ensure the product is an appropriate one for the client given the client’s financial situation, investment experience and investment objectives. The Code casts the obligation on the bank or firm to know the product is suitable. The obligation is not on the client.
It goes without saying that the person making the suitability assessment must have appropriate expertise to perform that task; have adequate training and information about the product, understand the product properly and be properly supervised. After all, the client is relying on that expertise and experience when making his investment decision.
SFC, 23 October 2008
INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND
AN ASIAN PERSPECTIVE
Information and advise duties: How to tackle « misselling » ? 10
An Asian perspective
Taiwan
The issuer should ensure that a product cannot be offered to non-professional investors in Taiwan unless the same product can be offered to non-professional investors in the jurisdiction where the offshore Issuer or the product is registered. Further, the terms of the offer in Taiwan must not be less favourable than those in the “home country”.
Why? Minibonds not offered in the US / Europe
China
Banks are responsible to ensure that the products are suitable for a particular category of clients.
INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND
AN ASIAN PERSPECTIVE
Information and advise duties: How to tackle « misselling » ? 11
The GISSLER Charter: Introduction
STRUCTURED LOANS ENTERED INTO BETWEEN LOCAL AUTHORITIES AND
CREDIT INSTITUTIONS
The GISSLER Charter is a charter of conduct of business between local authorities (collectivités locales) and credit institutions
The GISSLER Charter has been signed on December 7th, 2009
The GISSLER Charter is aimed at ensuring marketing of structured loans to local authorities compliant with their needs
Strong commitments of credit institutions under the GISSLER Charter
Local authorities are committed to a high level of transparency under the GISSLER Charter
Information and advise duties: How to tackle « misselling » ? 12
Main commitments of credit institutions under the GISSLER Charter:
STRUCTURED LOANS ENTERED INTO BETWEEN LOCAL AUTHORITIES AND
CREDIT INSTITUTIONS
Credit institutions refrain from marketing to local authorities:
Financial products exposing to a risk on principal or products based on high risk indexes
Financial product with cumulative index effects (“Snowbolling Effects”)
Credit institutions undertake under their marketing approach to present products according to an agreed classification of indexes
Local authorities are recognized as non professional investors
Reinforced information duties in favor of local authorities as regards the risks attached to structured products
Reinforced advise duties in favor of local authorities
Information and advise duties: How to tackle « misselling » ? 13
Main commitments of local authorities under the GISSLER Charter:
STRUCTURED LOANS ENTERED INTO BETWEEN LOCAL AUTHORITIES AND
CREDIT INSTITUTIONS
Reinforced transparency in respect of decisions regarding borrowing and debt policies of local authorities
Main features of borrowing and debt policies provided to the deliberative body of local authorities by the executive committee of such authorities
Such provision shall enable the deliberative body to define borrowing and debt policies the executive committee will implement
Reinforced financial information in respect of structured products subscribed by local authorities
Detailed presentation of the structure and outstandings of the structured products and the type of underlying indexes by the executive committee of local authorities
Such presentation shall be provided to the deliberative body of such authorities
Information and advise duties: How to tackle « misselling » ? 14
Do MiFID requirements apply to structured products entered into between local authorities and credit institutions?
STRUCTURED LOANS ENTERED INTO BETWEEN LOCAL AUTHORITIES AND
CREDIT INSTITUTIONS
MiFID requirements apply to financial contracts (contrats financiers such as swaps, etc…) entered into (in parallel of loans) between local authorities and credit institutions (as the case may be, local authorities will be considered as non professional clients, save in the event that they have chosen to be deemed as professional clients)
MiFID requirements do not apply to structured loans entered into between local authorities and credit institutions
(In its Feedback Statement dated 3 November 2009 on MiFID complex and non complex financial instruments, CESR provides that MiFID requirements do not apply to loans as they are not MiFID financial instruments)
Information and advise duties: How to tackle « misselling » ? 15
Features of PRIPs:
THE PACKAGED RETAIL INVESTMENT PRODUCTS (PRIPs)
They provide retail investors with easy access to financial markets
They offer exposure to underlying financial assets, but in packaged forms which modify that exposure compared with direct holdings
Their primary function is capital accumulation, although some may provide capital protection
They are generally designed with the mid- to long-term retail market in mind
They are marketed directly to retail investors, although they may also be sold to sophisticated investors
Information and advise duties: How to tackle « misselling » ? 16
Examples of PRIPs
THE PACKAGED RETAIL INVESTMENT PRODUCTS (PRIPs)
Investments packaged as life insurance policies
In unit-linked life insurance policies (assurance-vie en unité de compte), a portion of the premium is used to purchase life cover (the sum insured) with the balance invested in a fund such as a UCITS
The return on the policy is linked to the performance of the funds
As opposed to traditional life insurance products, unit-linked policies usually do not guarantee the payment of a determined financial amount in particular in the case of death / survival, but instead an amount which is a multiple of the market value of one or several units. Therefore, by definition, the policy holder bears the investment risk
Information and advise duties: How to tackle « misselling » ? 17
Examples of PRIPs
THE PACKAGED RETAIL INVESTMENT PRODUCTS (PRIPs)
Structured term deposits
Structured term deposits (dépôts à terme structurés) offer a combination of a term deposit with an embedded option or an interest rate structure
They are designed to achieve a specific payoff profile (profil de rendement), which they achieve through transactions in derivatives such as interest rate and currency options
Other examples:
Investment (or mutual) funds
Retail structured securities
Information and advise duties: How to tackle « misselling » ? 18
PRIPs: MiFID financial instruments ?
THE PACKAGED RETAIL INVESTMENT PRODUCTS (PRIPs)
In its feedback statement dated 3 November 2009 on MiFID complex and non complex financial instruments, CESR provides that the MiFID requirements do not apply to deposits or life insurance products as they are not MiFID financial instruments
The Commission of the European Communities considers that the appropriate approach is to apply the same legislative requirements across all sales of PRIPs, irrespective of the distribution channel employed
According to the Commission of the European Communities:
The MiFID provisions on conduct of business (including information and advise duties of investment services providers in favor of investors) and conflicts of interests offer a benchmark for such requirements
The extension of these measures to all PRIPs could be achieved by creating a new directive aimed at extending the scope of the relevant MiFID provisions so that they apply to all entities selling the relevant products
(Update on Commission work on PRIPs dated 16 December 2009 and Communication from the Commission to the European Parliament and the Council on PRIPs dated 30 April 2009)
Information and advise duties: How to tackle « misselling » ? 19
PRIPs: MiFID financial instruments ?
THE PACKAGED RETAIL INVESTMENT PRODUCTS (PRIPs)
Legal issues arising in France as regards life insurance products
Ordinance n° 2009-106 dated 30 January 2009 on life insurance products marketing and on mutual contingency and insurance transactions:
• Information duties applicable to life insurance providers
• Advise duties applicable to life insurance providers
European insurance community has expressed material concerns in respect of the application of MiFID to life insurance products marketing
• MiDIF requirements are not adapted to life insurance products (peculiarly, the classification of clients)
Information and advise duties: How to tackle « misselling » ? 20
Deletré Report 2: Introduction
A FRENCH APPROACH UNDER CONSIDERATION: THE DELETRÉ REPORT
2
The Deletré Report 2 dated July 2009 on the supervision of professional obligations towards customers in the financial industry deals with the whole of financial, banking and insurance products and services
Some recommendations of the Deletré Report 2 had been submitted to public consultation until 31 december 2009
Main purpose of the Deletré Report 2: implementation of a procedure aiming at improving customers’ protection and creating standardized rules in order to stop marketing practices non compliant with customers’ needs
Information and advise duties: How to tackle « misselling » ? 21
Main recommendations under the Deletré Report 2 submitted to public consultation
A FRENCH APPROACH UNDER CONSIDERATION: THE DELETRÉ REPORT
2
Introduction under French law of the loyalty principle (principe de loyauté) in the financial industry
Investment and banking services providers shall implement specific procedures so that they act loyally vis-à-vis customers
Supervision of such obligation by the French supervision authorities
Setting up of recommendations in order to implement the loyalty principle (such recommendations to be approved by the French supervisor, after consultation with customers and professionals)
Reinforced supervision of investment and banking services providers by professional associations which represent those providers (provided that such associations are authorized and supervised by the French supervision authorities in the financial industry)
Information and advise duties: How to tackle « misselling » ? 22
Main recommendations under the Deletré Report 2 submitted to public consultation
A FRENCH APPROACH UNDER CONSIDERATION: THE DELETRÉ REPORT
2
Burden of proof placed on the investment and banking services providers
Investment and banking services providers need to prove that they have acted loyally vis-à-vis customers
This implies relevant traceability system as regards due diligences conducted by such providers
The French Banking community has expressed material concerns in this respect
Information and advise duties: How to tackle « misselling » ? 23
Overview of the main requirements which may apply to products providers in the future: The approach in Asia
The approach in Asia represents a significant departure from the existing regime and imposes onerous additional obligations on the product providers. Similar to the proposals developed by the Committee of European Securities Regulators (CESR) and the “TCF” approach of the UK Financial Services Authority (FSA), it appears that product providers will, in the future, be required to:
ensure that products - covering all elements of design - are appropriate for the target market, given the risk tolerance and preference of that target market, and communicate this to distributors
provide enough information to the distributors to enable the distributors adequately to assess suitability for their customers
CONCLUSION
Information and advise duties: How to tackle « misselling » ? 24
Overview of the main requirements which may apply to products providers in the future: The approach in Asia
consider the distribution of the total gross investment returns of the product, split between the different stakeholders in the product and whether this distribution is fair, particularly from the investors’ perspective
ensure all relevant risks – market, liquidity, counterparty – are accurately identified and stress tested during the product design process
state clearly key product risks and assess these against prevailing market conditions
assess continually any risks posed to the product before and after the sale, and alert investors if contingency action needs to be taken
act with due care and diligence when passing on promotions which the product providers have created to the distributors
ensure that systems and controls offer an effective framework for risk management in a range of market conditions
CONCLUSION
Information and advise duties: How to tackle « misselling » ? 25
Some practical points from an Asian perspective
Issues to look for
Product v client suitability
Documentation of client profile
Refreshment of profile: requirements of the Code
Record of suitability assessment / recommendations made
Client sign-offs of profile
Audit trail of communications / correspondence with client
Language of account documentation
Ongoing self-assessments
CONCLUSION