The Financial Services and Markets Authority (FSMA) has conducted a study to evaluate the costs of structured debt instruments. Based on this study, it has set out several recommendations for the sector. As part of its aim to better inform consumers, the FSMA publishes information to help consumers better understand and assess the costs associated with such products.
What are structured debt instruments?
Structured debt instruments are complex financial products with a pre-established duration, offering a return linked, according to a more or less complex formula, to the performance of an underlying asset such as an equity index or an interest rate. The majority of structured debt instruments marketed in Belgium offer a right to repayment of the capital (except for entry fees) on maturity.
Analysis of the costs over the past 5 years
The FSMA has conducted an analysis based on 806 structured debt instruments offered to the public in Belgium between 1 January 2018 and 31 December 2022, for which the Key Information Document (‘KID’) was notified to the FSMA. The FSMA found that the costs on average remained relatively stable between 2018 and mid-2022 with a slight downward trend, which reversed at the end of 2022, in parallel to the interest rates going up. In the recommendations it addresses to the sector, the FSMA encourages costs not to be increased, even in an economic context of higher interest rates or better market conditions.
The FSMA considers that the characteristics of a product should not influence the margin of the issuer or the distributor and that the price paid for the additional risk taken by the investor should be fully devoted to structuring a more attractive potential return.
When a structured product is distributed, the FSMA will continue to ensure that the costs inherent to structured products remain at a level at which customers’ interests are properly taken into account.
Better informing consumers on the costs of structured debt instruments
As part of its task of protecting and educating financial consumers, the FSMA wishes to continue to better inform consumers. As it already did with the publication of its study of the costs associated with investments in funds, the FSMA is now providing consumers with information to allow them to better understand the costs of structured debt instruments.
Parallel to its recommendations to the sector, it is also publishing a communication aiming to:
- explain the main characteristics of structured debt instruments;
- detail the costs associated with structured debt instruments;
- explain how the annual cost impact indicator works, which investors can find in the Key Information Document[1];
- communicate to investors the average costs charged by issuers/distributors of structured debt instruments offered to the public
The communication can be consulted on the FSMA’s website.
[1] The Key Information Document (‘KID’) is a legal document that must be prepared in accordance with the provisions of the PRIIPs Regulation(Packaged Retail and Insurance-based Investment Products). The aim of the KID is to give retail consumers essential information about an investment product. It must be provided to investors before they subscribe to a product.