General questions on the purpose of the moratorium

The Special Committee of the Belgian Parliament tasked with investigating the financial and banking crisis recommended that the traceability of financial products be improved. With this initiative, the FSMA is following that recommendation. The Law of 2 July 2010 gives the FSMA the power to draw up regulations that prohibit or set limits on the marketing of retail investment products and that can improve transparency in pricing and administrative costs of such products. The moratorium is also in line with an international tendency, given that supervisors in several countries have already taken similar initiatives.

The moratorium applies to the distribution to the average individual investor in Belgium of structured products that are considered particularly complex. By structured products we mean products that have a derivative component. The moratorium applies to such products regardless of the form in which they are sold - UCIs, insurance contracts, notes or deposits.

Distributors can sign on to the moratorium voluntarily. In so doing, they commit themselves not to distribute structured products intended for individual investors (retail clients) and that are considered 'particularly complex' on the basis of the FSMA's criteria. The participating distributors will be placed on a list to be published on the FSMA website. They can choose not to apply the moratorium to retail banking clients, defined as clients who hold at least 500,000 euros with one institution.

The FSMA has developed four criteria in order to determine whether a structured product is 'particularly complex'. If any one of these criteria is not met, the product is considered particularly complex.

4.1. Underlying value: The underlying value is sufficiently accessible and transparent to the consumer. Shares and bonds that are listed on a regulated market, for instance, are regarded as sufficiently accessible; credit default swaps, life settlements or hedge funds, by contrast, are considered not to be accessible. Baskets of shares may be considered accessible if they are put together on the basis of an economic principle and in the interests of the client, and if all necessary information regarding their composition is provided.

4.2. Complex strategy: The investment strategy is not overly complex. A strategy is viewed as overly complex if:

• a decrease in the underlying value is passed on to the investor more than an increase in its value;
• distributors of the product make use of 'teasers', such as a very high yield that does not apply to the product's entire lifetime, or gifts given upon the purchase of a product;
• a minimal change in the underlying value has a disproportionate effect on its yield;
• the capital protection built into the product is conditional.

4.3. Complex calculation formulas: The yield is not calculated on the basis of more than three mechanisms. Mechanisms that work to the advantage of the investor (a minimum return or a returned fixed “by cliquet”) do not count.

4.4. Transparency regarding costs, credit risk and market value: There must be sufficient transparency regarding all costs associated with the product, the name of the issuer must be mentioned, the product's market value must be published at least quarterly and the client must be informed of any significant changes in the risk profile or the value of the product.

In order to apply the criteria, a decision tree has been drawn up. Distributors who sign on to the moratorium must test their new products using this decision tree.

The moratorium is a future-oriented initiative and applies only to new products placed on the market after the moratorium comes into effect. The initiative does not pass judgment on products that have been sold in the past, on their risk level or on compliance with the regulatory framework applicable to the relationship between financial institutions and their clients before the entry into force of the moratorium.

The initiative is a first step in a process that is intended to lead to a simpler and more transparent product range. The FSMA wishes hereby to ensure greater transparency regarding the precise composition of a given product and the related costs. But the fact that a product is not considered 'particularly complex' says nothing about the risks associated with it.

The moratorium says nothing about the risk associated with a product. It does, however, contribute to greater transparency and simpler financial products for the average investor. Products with capital protection can also be complex, for instance where their yield depends on overly complex constructions or where their underlying value is not accessible.

The FSMA has opted for a gradual approach. The voluntary moratorium on particularly complex structured products is the first stage of a process of designing regulations for the distribution of structured products. The question of whether initiatives need to be taken in respect of other products can be examined later.

The voluntary moratorium serves a twofold purpose. First and foremost, it guarantees the necessary restraint in distributing new products during the consultation period regarding the new regulation on structured products. The rules governing the distribution of structured products that will result from the process will be drawn up on the basis of the results of the public consultation to be launched this summer. Moreover, the moratorium makes it possible for a rapid change in the market.

All distributors can sign on to the moratorium voluntarily. Those who choose to participate will be entered on a list published on the FSMA website. Participants that do not apply the criteria may be struck from the list. The FSMA will monitor compliance with the criteria by reviewing prospectuses and via the product information it receives.

The moratorium comes into effect on 1 August 2011. It will remain in force during the public consultation that the FSMA will conduct regarding the distribution of structured products. Based on that consultation, the FSMA will draw up a new regulation on the distribution of structured products. When that regulation comes into effect, the voluntary moratorium will come to an end. The aim is to present a draft of the new regulation by the end of the year.

Professionals who would like more information on the moratorium are advised first to contact the financial institution(s) with which they work. Their professional organizations can also provide further information.

They may also contact the FSMA for additional information. The FSMA can reached at the email address: pro@fsma.be.