Retail structured products in Europe: developments in product intervention

Introduction

The latest amendments of the European Commission to the Markets in Financial Instruments Directive II Proposal (MiFID II)[1] and in particular to the Markets in Financial Instruments Regulation Proposal (MiFIR)[2] would introduce a regime whereby the competent authorities and ESMA would assume a more proactive role in the protection of investors and financial markets. European supervisory authorities mandated to protect the stability of financial markets as well as consumers identified the need for fundamental changes in order to monitor the capital markets and derivative trading. A focus on transparency has been deemed inappropriate to warrant the protection of retail investors, since investors are often unable to comprehend the functions of complex products and disclosures or commission-driven advice which leads to inappropriate decisions with regard to the risk and pay-off profile of the investor. Legal requirements with respect to disclosure in plain language and additional information sources may create the so-called problem of information overload. In addition, while authorities have made clear that financial institutions have responsibilities to design products which are appropriate for the intended target market, they have in practice merely focused on the ‘point of sale regulation’ to try to prevent mis-sales, ie on product disclosures, promotions and selling practices. Nonetheless, regulators have claimed that they do not have sufficient resources to prevent potential risks. Hence, it is explored whether next to the current point of sale regulation or judicial intervention a more intrusive regime of the creation of the product should be taken, whereby the competent authority shall conduct a market introduction control. Such a regime has been already discussed or has even taken effect in varying degrees in member states.[3]