Date Published 12/07/2022
Central Bank Structured Retail Product Review
The Central Bank of Ireland (the “CBI”) has issued a “Dear CEO” letter dated 22nd April 2022 (the “Letter”) relating to structured retail products (“SRPs”). The Letter includes details of its findings following a series of reviews of the area and sets out its expectations and actions required by relevant firms in light of this. It also includes a detailed appendix including further granular detail of its findings and related expectations.
The MiFID II regulatory reforms increased the obligations of relevant firms in a range of key areas including in particular their obligations regarding identifying the target market for specific products and for manufacturers to ensure that these are designed to meet their requirements. The low interest rate environment of recent years has seen significant growth in the market for complex SRPs as retail investors sought higher yields than those available from more traditional capital-protected products. The CBI conducted a series of targeted reviews of SRPs manufactured and distributed in Ireland in light of this evolving and increasingly complex market and has now issued the Letter documenting its findings, expectations and next steps.
Overview of Findings
The Letter notes that the CBI identified a range of poor practices and weaknesses in policies and procedures employed by relevant firms in relation to SRPs. Key examples included failure to adequately identify the target market, failure to ensure client comprehension of complex features of SRPs and inadequate warnings and disclosures across a range of areas and features.
The Letter clarifies that the CBI expects firms to act in the best interests of clients at all times. It emphasises the need for them to protect clients in particular when also acting as product manufacturer and distributor. Proportionate assessment of the target market and confirmation as to the appropriateness of the product for this are key requirements as well as the inclusion of appropriate risk warnings and fair and balanced information pertaining to likely investor outcomes.
The Letter clarifies that all firms who manufacture, distribute or otherwise offer SRPs must conduct a thorough review of related practices including (a) presenting the Letter as a formal board agenda item; (b) undertaking a full review in light of the findings of the Letter; and (c) documenting the review and steps to be taken, with a related action plan to be approved by the board by the end of Q3 2022. The CBI also notes that the findings set out in the Letter are not exhaustive and accordingly relevant firms should continue to refer to the underlying legislation, industry guidance (including the generic expectations set out in the Letter) and relevant underlying principles to ensure they ae complying with related best practice.
- The letter requires in particular:
Target market assessments must be done in a proportionate manner that considers the nature and complexity of the product. More onerous and granular target market assessments are appropriate for more complex SRPs.
- If complex features are proposed, consideration should be given as to whether they are appropriate for the retail market and whether they are likely to be understood by the target market. The approval of the use of such features should be subject to challenge to ensure they are in clients’ best interests and this should be documented.
- Past performance (back-testing) information, if included, must be fair and balanced, supported by clear narrative and context, and must not diminish the potential of loss.
- Warnings for Capital at Risk must be prominent in all communications and advertisements.
- For complex products such as SRPs, special care is needed regarding marketing information to ensure the overall content when read together, remains clear, fair and not misleading and in particular avoiding presenting an overly-optimistic or unbalanced picture of the likely outcomes.
- Clients must receive disclosure of the risk that a product may be restructured prior to sale.
- The Central Bank expects firms to act in the best interests of investors at all times and adhere to high standards of investor protection.