Guidelines on financial instruments and related services to retail clients.

Olivier Hermand 31 July 2015


The Financial Services and Markets Authority has published a communication on the offer of certain financial institutions’ financing instruments and the provision of services related to such instruments to retail clients.

On 29 July 2015, the Financial Services and Markets Authority (FSMA) published a communication FSMA_2015_08 dated 27 July 2015 on the offer of certain financial institutions’ financing instruments and the provision of services related to such instruments to retail clients (the Communication).

In this Communication, the FSMA issues guidelines for the offer to retail clients and the provision of services to such clients related to the following types of financial instruments:

  • contingent convertible debt instruments (CoCos);
  • subordinated bonds part of financial institutions’ own funds; and
  • credit institutions’ and investments companies’ financing instruments that could be used to bail-in.

These guidelines indicate how the FSMA envisages the implementation of existing regulations in case of offer and provision of services via the banking and insurance channels. However, please note that these guidelines also contain recommendations to be applied by financial institutions as of 1 September 2015. The FSMA proposes to assess these guidelines at the end of 2017 or earlier if significant changes should occur at European level.

1. CoCos

The FSMA considers that retail clients have no sufficient knowledge and experience to estimate the risks related to the CoCos. As a consequence and as previously expressed by the European Securities and Markets Authority (ESMA) in its declaration of 31 July 2014, CoCos should not be considered as appropriate or suitable products for retail clients. However, the FSMA specifies that a service provider may offer this type of product to a retail client only if:

  • the client has, with this service provider, deposits and financial instruments for a total amount exceeding EUR 500.000;
  • the proposed investment covers only the part exceeding the reserve of EUR 500.000;
  • the service provider shows particular vigilance in the application of rules of conduct and ensures that the client has sufficient knowledge and experience to estimate the risks related to CoCos; and
  • a specific warning is provided to the client mentioning that the FSMA considers the products as inappropriate for retail clients.

2. Subordinated bonds part of financial institutions’ own funds

FSMA estimates that, in the validation process of these products, additional organisational measures must be taken to ensure the client’s interest and in particular that the pricing is consistent with market’s conditions.

In addition, the FSMA recommends that any marketing on these products must highlight the related risks and must not emphasise the repayment of invested capital or the payment of the contractually provided coupon.

As a general principle, the FSMA considers that the possibility of investing in these debt instruments may only be offered to retail clients having sufficient knowledge and experience and who understand that these products have a potential equity risk.

3. Bail-in

In this Communication, the FSMA also reiterates that in order to consider a bail-in as a credible measure, establishments must meet by 1 January 2016 a minimum requirement of own funds and eligible liabilities (also known as, MREL). However, in the current state of European regulations, no publication of MREL nor of the volume of third party’s funds eligible for bail-in has been foreseen. As a consequence, the FSMA has taken the initiative to seek the review of the information on the bail-in mechanism at European level. In that respect, please note that ESMA has decided to create a task force within the Investor Protection and Intermediaries Standing Committees (IPISC) to examine this issue and to conduct a dialogue with the European Banking Authority (EBA).

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