Marketing financial instruments to retail clients - Spain introduces a stricter regime

To help avoid "bad practice" in the marketing of complex products to retail clients, on 05 November 2015, Order ECC/2316/2015 on information obligations and classification of financial instruments (the Order) was published in the Official State Gazette in Spain - Boletín Oficial del Estado (BOE).

Three months after publication, the Order will now enter into force in February 2016.

The Order aims to ensure that clients or potential clients (together "Clients") of financial institutions receive an adequate level of protection by establishing a standardised system of information and classification about financial instruments. This provides Clients with information about the level of risk level entailed and allows them to choose instruments which better suit their needs and investment/saving preferences. In that context, entities will provide Clients with a risk indicator and, in some cases, liquidity and complexity alerts, which should be considered as pre-contractual documentation/information.

Scope

The Order applies to the following financial products (Products):

• financial instruments included in Article 2.1 of the Consolidated Text of the Spanish Securities Market Act of 23 October 2015 (SMA) (as consolidated) - these basically correspond to financial instruments as defined in Annex I, Section C of MiFID
• bank deposits (including, among others, demand deposits, saving deposits and term deposits)
• life insurance products with a saving element (including assured saving plans), and
• pension funds (both personal and corporate).

The Order expressly excludes the following Products:

• products subject to Order ECC/2329/2014 of 12 December 2014, which regulates calculation of expected return in life insurance operations, ie collective insurances implementing pension commitments, company saving plans, pension plans set up through insurance contracts for the coverage of risks and benefits of the plan
• public debt issued by the State, autonomous communities and Local Entities which are considered as liquid and solvent products
• products which are subject to the EU’s PRIIPS (KID) Regulation, and
• units and shares of collective investment schemes (CIS) which are subject to the Commission Regulation (EU) No 583/2010 on UCITS key investor information.

The Order applies to the following Spanish entities when providing investment services or marketing to Clients (directly or through other sale channels), on Spanish territory in respect of any Products:

• investment firms and other entities licenced to provide investment services in Spain
• credit entities
• financial credit establishments
• insurance companies, and
• pension fund management companies.

In addition, the Order expressly includes the following foreign entities when providing investment services or marketing to Clients (directly or through other sale channels), on Spanish territory in respect of any Products:

• branches in Spain of entities listed in the previous section which are authorised in a EU Member State or in a third country
• entities listed in the previous section which are authorised in a EU Member State or in a third country when acting in Spain through a tied agent based in Spain
• investment firms and other entities licenced to provide investment services in Spain, credit entities and financial credit establishments authorised in a EU Member State when operating in Spain on a cross border basis (by means of an EU passport), and
• investment firms and other entities licenced to provide investment services in Spain, credit entities, financial credit establishments authorised in a third State when operating in Spain without setting up a branch.

The Order excludes entities which only provide management portfolio services (as set out in Annex I, Section A, (4) of MiFID) or deal only with professional clients as defined under Annex II. I of MiFID.

Originating entities and issuers of Products will be subject to the Order when providing investment services or marketing Products.

New information and classification obligations of financial products

The Order establishes the following new information and classification obligations (which will also apply when distance marketing) in respect of the Products:

Risk indicator

Firms must provide Clients with an updated risk indicator of the Product (Risk Indicator). This must be included in any marketing communication of financial products which includes specific information about features and risks. In addition, where a general description of the nature and risks of the Products is provided to Clients prior to acquisition, this must also include the Risk Indicator.

The Order establishes six classes of Products, from less risk to higher risk, in accordance with the following traffic light graphic:


Liquidity alerts

When applicable, firms must provide Clients with an updated liquidity alert in respect of the Product (Liquidity Alert), covering the likely liquidity limits and risk of the anticipated sale of the Product. This must be included in the communications listed in the Risk Indicator section above.

The Order establishes a padlock symbol (simple or double) followed by a specific statement related to the liquidity of the Product which must be included in relevant communications and which will vary according to the specifics of each particular case.

Complexity alerts

Finally, when applicable, firms must provide Clients with an updated complexity alert in respect of the Product (Complexity Alert), regarding the complexity of the Product.

The Order requires the use of an exclamation mark, followed by the statement: “financial product which is not simple and may be difficult to understand”, to be included in applicable communications.