In the year since the Lehman failure, we have seen quite a number of regulatory initiatives relating to structured product sales in the EU and in Asia. We are devoting the next few issues of this newsletter to a review of the principal developments affecting the structured products market in the EU.
Background – The EU Financial Package
The European Commission (the "Commission")'s initiative on packaged retail investment products ("PRIPs"), i.e., retail investment products ("RIPs"), which are packaged and marketed to retail investors, forms part of the "financial package" announced by EU Commissioner Charlie McCreevy in a press conference on 29th April 2009.1 The EU financial package also included:
a proposed directive on alternative investment fund managers, including hedge funds and private equity (the "AIFM Directive");2 and two recommendations by the Commission on remuneration policies for risk-taking staff in financial services firms and for directors of listed companies, respectively.3 European Commission's Communication on Packaged Retail Investment Products (29th April 2009)4
On 30th April 2009, the Commission published a Communication (the "EC Communication") on PRIPs, together with a related Impact Assessment and Executive Summary of the Impact Assessment. On 29th April 2009, it published a press release and frequently asked questions ("FAQs") outlining its proposals to improve investor protection measures in respect of PRIPs.5
PRIPs are inherently diverse and include investment funds (including UCITS products), insurance-based investments, retail structured products and structured term deposits. Regulators believe that PRIPs raise greater concerns regarding product transparency (i.e., information disclosure, particularly as to their risks and costs) and the sales process.
The outbreak of the credit crisis in mid-2007 engendered renewed urgency in the Commission's review of the legal framework governing PRIPs in the EU, in particular, the risks to retail investors resulting from variations in EU rules on product disclosure and selling practices. Thus, the Commission had issued on 26th October 2007 a call for evidence on the "Need for a Coherent Approach to Product Transparency and Distribution Requirements for Retail Investment Products?"6 (acting in response to ECOFIN request in May 2007).
Based on this work, the Commission has concluded that the current EU framework was a "highly fragmented, regulatory patchwork," in that there is currently no coherent approach to investor protection standards in respect of the many legal forms of PRIPs and that the inconsistencies act as a barrier to informed decision making by investors in PRIPs.
Therefore, the Commission intends to introduce a "horizontal" legislative approach to provide a coherent basis for the regulation of mandatory disclosures (particularly disclosures relating to risks and costs) and selling practices at the European level.
Enhanced disclosures and product transparency
The objective is to achieve a highly harmonised standard of disclosures that will be applied to all manufacturers of PRIPs, regardless of the legal form that the products may take.
The following are the guiding principles in designing the (mandatory) key investor disclosures, which:
should be "fair, clear and not misleading" and "comprehensible to their target investors;" should contain the information necessary to enable an "informed investment decision" in as much of a "standardised fashion that promotes comparisons between the products;" should be presented "in a format appropriate to a retail investor;" should be provided in a timely fashion; and should be clearly distinguished from any associated marketing communications (which should also be fair, clear and not misleading). All those who sell PRIPs (i.e., both the intermediaries and the manufacturers selling their own products) should...