Italy’s structured retail products market has reacted with caution to the new guidelines on the marketing and distribution of complex financial instruments issued by the country’s financial markets regulator the Commissione Nazionale per le Societa’ e la Borsa (Consob) just days before the start of the new year.
The ten-page document is intended as a follow-up to the original proposals put forward by the regulator in June 2014’s public consultation, which were described at the time as “unnecessary” and “distorting the EU level playing field” by the secretary general of the European Structured Investment Products Association (Eusipa), Thomas Wulf.
The new document restates the regulator’s concern with what it calls the “retailisation” of complex products traditionally reserved for institutional and professional investors. However, the scope and tone of the final proposals have been recalibrated, to reflect the industry’s reaction.
Complexity vs risk
Most notably, Consob has dropped the proposal of a voluntary moratorium on all “complex” products (including notes, funds and certificates), a measure that threatened to severely hurt the Italian market had it gone through.
Also crucial is the regulator’s express acknowledgement that “complexity” does not equate to “risk”, an assumption that market practitioners say was erroneously made in the original proposal.
“Consob has finally recognised that ‘complexity’ is an ever-changing concept and that ‘complex products may entail low risk, while simple products may entail high risk’ for retail investors,” said Dario Savoia, chairman of Acepi, Italy’s structured products association.
Not everyone in the market has reason to be so optimistic. Laetitia Bianchi of sales and marketing at Société Générale, said that although the latest Consob document is “certainly an improvement” on the original proposals, the full extent of the impact it will have on the industry is still to be seen.
“Based on some preliminary discussions with certain industry associations such as the ABI (the Italian Banks Association), we anticipate that there will be an impact on the market, particularly for distributors of the five types of products listed by Consob as ‘highly complex’,” she said. “Clearly, at SG we already have an advanced compliance infrastructure that ensures good practice and due diligence at all stages of product development. For most large players in the market this is the case.”
According to Bianchi, the new rules will be most problematic for smaller intermediaries that may not have such an advanced infrastructure in place, something that is shared by other banks.
“That Consob ultimately states that all structured products are ‘complex’ certainly doesn’t help when it comes to the marketing and distribution of these products to the retail client,” said a source from one of the top five investment banks in Italy, who did not wish to be named. “In particular, we don’t understand the definition of CLNs as ‘highly complex’ and therefore unfit for the retail market. If a product is tied to the credit default risk of an investment-grade company, it is surely less risky than many other products not highlighted as ‘complex’ by Consob. It doesn’t seem right to lump them all in together.”
Small providers
A number of smaller intermediaries approached by SRP declined to comment on the guidelines, citing internal reviews taking place. “We are currently evaluating the impact this will have on our current model, but we can anticipate certain things will have to change,” said one source speaking on condition of anonymity.
Matteo Carradori, director at the Verona-based online analytics and financial modelling firm Fairmat, told SRP that while Consob’s latest document is a step in the right direction, it falls short.
“It’s certainly positive that this document anticipates the directives provided in Mifid II, as this gives providers who are currently not compliant time to prepare for the incoming reforms,” he said. “However, identifying CLNs as a ‘highly complex’ product worthy of extra due diligence is in my opinion wrong and directly contradicts Consob’s own admission that ‘complexity is an ever-changing concept’.”
According to Carradori, CLNs are not inherently riskier than any other type of structured product. If CLNs are judged as particularly risky, he asked, why are FX-linked products not?
“What investors want is a clear and concise measure of the risk-return profile of a product,” said Carradori. “Armed with a quantitative, probabilistic projection for each product, investors can decide whether they want to buy into a risky product offering high but improbable returns, or one offering lower but more likely payouts. Ultimately this is what Iosco’s final report on the 2013 “Regulation of Retail Structured Products” recommends.”
New provisions
According to Savoia, this latest Consob report marks a welcome shift in focus from specific types of products to the due diligence and “enhanced care” of intermediaries at the design and distribution stages of all complex instruments, which brings the Italian regulator in line with existing European requirements as well as anticipating many of the reforms that will come into force with the introduction of Mifid II in 2017.
“Overall, the Italian retail structured products market will not suffer a huge impact, if we consider that most market players in Italy have already put in place ‘good practices’ from a legal and compliance point of view, in line with applicable EU regulation,” he said. “It’s important to remember, too, that Consob’s communication is made up of a series of recommendations to the industry and does not count as binding statutory regulation.”
The new document makes a series of recommendations to distributors of complex financial instruments on the adherence to the codes of good practice and due diligence.
The products identified as “highly complex” for the retail market include derivative products issued as securitisation of receivables such as asset-backed securities; products for which the conversion into shares or the reduction in the nominal value is provided in certain conditions such as contingent convertibles; credit-linked products (CLNs); and capital-at-risk OTC structured products.
Product governance is also of concern for the Italian regulator and follows the line set out by the European Securities and Markets Authority (Esma) which requires distributors and intermediaries to take full account of the needs, socio-economic characteristics and risk tolerance of their clients at the engineering, marketing and distribution stages of all their products.
According to Consob, exchange-traded products (ETPs) constitute up to 90% of the retail market in Italy and, except for CLNs, do not fall into the category of “highly complex”.
The deadline to demonstrate the correct and thorough application of these guidelines is June 30.
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