Financial products marketed in Belgium to retail clients will, as from 12 June 2015, be assigned a standardized risk label. The technical requirements for the label are laid down in a Regulation by the Financial Services and Markets Authority (FSMA). The Regulation has been approved by a Royal Decree published today in the Belgian Official Gazette (Moniteur belge / Belgisch Staatsblad)[1].
The introduction of risk labels for certain financial products came in response to a question that arose in the aftermath of the financial crisis, and was included in the federal governmental agreement of 2011 and in the recommendations of the Dexia Committee[2]. The label indicates the risk level of savings and investment products in a highly standardized format. It is intended to enable retail clients to gain an initial insight into the risk associated with such products.
The Regulation sets out the criteria used to categorize savings and investment products in one of the five classes on the risk label. The principle underlying the criteria is the degree of risk of not recovering one’s initial investment at maturity. The main lines governing the classification are as follows:
- class 1: financial products denominated in euro that fall under the deposit guarantee scheme offered by a highly creditworthy Member State of the European Economic Area, and debt securities denominated in euro issued directly by such a Member State (e.g. a savings or term deposit account or a Class 21 insurance contract written by a Belgian credit institution or insurance company);
- class 2: financial products denominated in euro that promise to repay the investment after at most 10 years, issued by a creditworthy debtor (for instance an 8-year bond issued by a company with an investment grade rating);
- class 3: financial products denominated in euro without capital protection but with a risk spread and limited volatility, and class 2 products with a maturity over 10 years or which promise to repay at least 90 per cent of the investment (e.g. units in a harmonised investment fund with a volatility indicator of SRRI 3);
- class 4: financial products that cannot be specifically allocated to classes 1, 2, 3 or 5 (such as a share, a subordinated bond or a bond denominated in a foreign currency);
- class 5: derivative instruments and equivalent products (such as CFDs and options).
Moreover, the FSMA Regulation determines the appearance of the risk label. The design of the label is based on the energy label developed for electrical appliances. Each of the five risk classes is assigned a different coloured arrow (see illustration below). The risk label has been tested by a consumer panel. The panel decided that the risk label meets a consumer need and will help better inform and protect consumers.
The inclusion of the risk label in advertising and potentially in the information sheet prepared in conjunction with the marketing of a savings or investment product to retail clients in Belgium is mandated by royal decree. The Royal Decree on certain information obligations applicable to the marketing of financial products to retail clients will enter into force one year after its publication in the Belgian Official Gazette (Moniteur belge / Belgisch Staatsblad), that is, on 12 June 2015. Wikifin.be will in due time be updated in order to provide consumers with information on how the risk label works.
[1] Royal Decree of 25 April 2014, published in the Belgian Official Gazette (Moniteur belge / Belgisch Staatsblad) on 12 June 2014.
[2] The Special Committee set up in the Belgian Chamber of Representatives and tasked with investigating the circumstances that led to the dismantling of Dexia SA/NV recommended, in its report of 23 March 2012, that consumers be given assistance in assessing product-related risks by means of a labelling system (Parl. Docs, Chamber, 2011-2012, no. 53 – 1862/002, p. 410).