NEWS | EUROPE
Ireland’s CBI demands industry action on complex structured products The Central Bank of Ireland (CBI) has written to Mifid investment firms, outlining the findings from a series of targeted reviews of structured products aimed at retail investors. ‘In particular, we want to see that complex investment products are designed with real investment needs in mind, that they are targeted only at investors with those needs and that the risks are properly explained,’ said Kincaid, adding that the CBI requires firms to take action to improve their performance on each of these fronts, as well as highlighting good practices which it wants to see emulated across the sector. In the letter, the CBI asks regulated firms to take action to identify a sufficiently granular target market for structured products and to drive improvements in the quality and transparency of disclosures to investors of the risks relating to these products. The reviews found a number of poor practices and weaknesses in firms’ processes, which increase risks to investors. This includes failure by firms to consider potential difficulties investors may have in understanding the complex features in some structured products; failing to present past performance information in a fair and balanced manner; and not including prominent capital-at-risk warnings in marketing materials. ‘The retail investment market is changing rapidly, with an increasing shift away from traditional, capital protected products to more complex, capital at risk products,’ said Colm Kincaid (pictured), director of consumer protection, Central Bank of Ireland. The regulator carried out these reviews because it wants to see that regulated firms meet high standards in how they design, manufacture and distribute complex investment products to retail investors, according to Kincaid.
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In particular, given the increasingly complex nature of structured products, the regulator deems it essential that the assessment of the target market is done in a proportionate manner, one that considers the nature and complexity of the product. Where complex features are proposed, firms must consider if they are appropriate for the retail market and whether they are likely to be understood by the target market. Information about
past performance (back-testing) must be fair and balanced, must be supported by clear narrative and context, and must not diminish the potential likelihood of capital loss with the regulator stressing that care must be taken to avoid presenting an overly optimistic or unbalanced picture of the likely investor outcomes. Capital-at-risk warnings must be in a prominent location in all marketing communications and advertisements. Finally, in the case of complex structured products, special care is needed when designing and presenting marketing information to ensure that individual statements, as well as the tone and overall content when read together, remains clear, fair and not misleading. Just four investment firms – Broker Solutions, BCP Asset Management, Cantor Fitzgerald Ireland, and Moloney Mortgages Pensions and Investments – were active in the distribution of structured products in Ireland during 2021, according to SRP data. Together they launched 55 structured products targeted at retail investors, down from 90 products the previous year, according to SRP data.
We want to see that complex investment products are designed with real investment needs in mind
