THE FINNISH STRUCTURED PRODUCTS ASSOCIATION´S COMMENTS ON CONSULTATION PAPER INCLUDING ESMA´S TECHNICAL ADVICE ON POSSIBLE DELEGATED ACTS CONCERNING THE PROSPECTUS DIRECTIVE AS AMENDED BY THE DIRECTIVE 2010/73/EU
The Finnish Structured Products Association (FSPA) welcomes the opportunity to give its comments on Consultation Paper including ESMA´s technical advice on possible delegated acts concerning the Prospectus Directive as amended by the Directive 2010/73/EU.
The Finnish Structured Products Association is a registered non-profit organisation founded in 2005 to promote the Finnish financial investments and especially to support Finnish offering of structured investment products and the operating environment. For achieving its mission the FSPA is developing common practices for its 21 members and their companies and recognizing / answering compliance and regulatory challenges to the business. FSPA also offers education, research, information and publications. More information on www.sijoitustuotteet.fi.
FSPA has given these comments specifically in respect of issues of structured products. FSPA is of the view that ESMA has not reached to fulfill the objectives of the directive to simplify and improve directive´s application or to increase its efficiency nor to enhance the international competitiveness of the Union, by contributing to the reduction of administrative burdens. Furthermore FSPA is of the opinion that ESMA´s proposals do not enhance investor protection. FSPA expects quite opposite. FSPA especially disagree ESMA´s approach to withdraw all flexibility in respect of the final terms and ESMA´s proposals regarding the summary. The withdrawal of all flexibility in respect of the final terms is neither in line with the directive nor the mandate requiring preserving the flexibility of the base prospectus regime. This would delay and complicate especially issues of the structured products as it is not possible to predict 12 months beforehand what kind of products investors would prefer to invest in.
As the structured products are often issued under base prospectus ESMA´s proposals would increase the size of the already extensive base prospectuses and the final terms including the summery significantly. It would also increase the amount of the supplements and therefore increase the costs and administrative burdens especially in respect of the structured products. The massive documentations do not help investors to understand the offers any better but rather increase the confusion and cause investors to avoid becoming familiar with the terms of the offer and especially the base prospectus containing hundreds of pages.
FSPA would prefer to await the PRIPs legislation as it might provide a more practical solution to present the information in the summary.
FORMAT OF THE FINAL TERMS TO THE BASE PROSPECTUS (ARTICLE 5(5))
Q1: Do you consider the list of “Additional Information” in Annex B complete? If not, please indicate what type of information could be classified as “Additional Information” and to what item they would belong to (CAT A, CAT B or CAT C, as defined in Part 3.III). Please add your justifications.
FSPA is of the opinion that there should not be fixed list of items that should be allowed in the final terms as that would be contrary to the Amended Prospectus Directive. With respect of categorisation FSPA does not see that the categorisation of the information to CAT A, CAT B and CAT C would as such add any value when defining the information to be included in the final terms. Especially there is no need to have CAT B and CAT C as an independent category as they both seem to carry the same kind of information “not known at the time of the approval of the base prospectus”.
Additional Information that issuers should be able to include as additional information would be inducements and information regarding the product specific taxation. In accordance with the MiFID issuers are obligated to disclose the inducements paid distributers. It is also possible that all relevant product specific tax information is not possible to add to the base prospectus.
Q3: Under “CAT. B” items, is the list of details which can be filled out in the final terms complete? If not, please indicate with your justifications what elements should be added.
FSPA strongly disagrees with ESMA´s inflexible approach regarding the information in the final terms. ESMA considers that the general principals of the way of redemption and the settlement procedure of the derivative security shall be laid down in the base prospectus. Only then the payout formula can be included in the final terms. Further ESMA points out that a new “pay out” of the derivative security can be interpreted as a new product and shall for this reason be disclosed in the base prospectus instead of the final terms. This applies also to the effect of the underlying asset on the investment and risk factors associated with the security. This approach can lead to substantial increase of the size of the base prospectus and as it is not possible for the issuers to foresee the market movements and investor interest over a 12 months period beforehand to the substantial amount of supplements. ESMA argues that all the above mentioned information has to be approved by the competent authority. FSPA does not share this opinion.
Indices should also be possible to be included in the final terms without having to include them first in the base prospectus. Indices are widely used in structured products and the necessity to include a large number of indices not composed by the issuers to the base prospectus would be costly due to the license fees and space consuming due to all the disclaimers that should also be added to the base prospectus. FSPA believes that ESMA´s approach would for these reasons lead to substantial increase of the supplements especially in the structured product issues.
FSPA is of the opinion that ESMA´s approach is not only a one step backwards but also increases the costs, administrative burden and furthermore the difficulty of the investors to understand and willing to become familiar with the offer terms including especially the base prospectus.
Furthermore ESMA´s approach is not in line with ESMA´s own statement that it wants to avoid imposing on issuers the obligation to systematically produce a supplement as this greatly impair the flexibility of the final terms regime by creating excessive administrative and procedural burdens for issuers and would not be in accordance with the Recital (4) of the Amending Prospectus Directive. FSPA hopes that this would also apply to the derivative securities.
Q4: Based on the instructions given in this document, could you please estimate the increase of the number of supplements to be approved in per cent?
It is not possible to give any specific figure, but FSPA anticipates that in respect of structured products the need of supplements would increase significantly as in this market the product development is quite rapid and it is not possible to foresee what kind of products investors would prefer to invest in and how the market would develop over the following 12 months period.
Q5: Based on the instructions given in this document, could you estimate the increase of the relevant costs?
FSPA anticipates that the proposed model will increase the costs substantially especially with respect of the issuers of the structured products.
Q6: Do you agree with the proposed mechanism of combining the summary with the final terms? If not, please provide your reasons and an alternative suggestion.
FSPA does not agree with the proposed mechanism of combining the summary with the final terms as there is also PRIPs legislation on the way which handles the same matter. FSPA would prefer to await the PRIPs legislation as it might provide a more practical solution to present the information in the summary.
Q7: Please estimate any possible costs that this mechanism would imply for issuers.
FSPA anticipates that the proposed mechanism will increase the costs substantially especially with respect of the issuers of the structured products.
FORMAT OF THE SUMMARY OF THE PROSPECTUS AND DETAILED CONTENT AND SPECIFIC FORM OF
THE KEY INFORMATION TO BE INCLUDED IN THE SUMMARY (ARTICLE 5(5))
Q8: Do you agree with our modular approach?
FSPA is of the opinion that it is necessary to add flexibility. FSPA believes that ESMA´s proposal is too detailed and containing too much information which is not in line with the Amendment Prospectus Directive. Flexibility is especially needed in respect of the structured products. FSPA refers to the PRIPs legislation, which should be taken into consideration at this point although the legislation is still unfinished.
Q9: Do you agree with our approach of identifying the mandatory key information to be contained within five sections?
No. FSPA believes that the content should be reconsidered as all the items f.ex the pro forma financial information is not possible to be presented in a brief summary and also there is too much information required to be included in the summary which is not in line with the Amendment Prospectus directive´s requirement of a short simple, clear and easy for the targeted investors to understand summary.
Q10: Do you agree that we have provided sufficient flexibility for issuers and their advisers in drafting
summaries – whilst ensuring that summaries are brief and provide the reader with the necessary comparability between prospectuses?
No. FSPA is of the opinion that there is not sufficient flexibility for issuers and their advisers. If summary is meant to contain all the information ESMA proposed the summary is not going to be in accordance with the directive´s requirement being short, simple, clear and easy for the targeted investors to understand.
Q11a: Do you agree that our approach adequately limits the length of summaries?
No. FSPA believes that ESMA´s approach containing too much detailed information is going to lengthen the summaries and not to limit them. Reconsideration of the items to be included should be done.
Q11b: What is “short” for a summary for: (i) an issuer; & (ii) an investor?
The concept “short” is a relative concept depending on the issuer and the product in question.
Q11c: Do you think that there should be a numeric limit on the length of summaries? If so how might that be done?
FSPA do not agree that there should be a numeric limit on the length of summaries as issuers and products are not similar and therefore individual circumstances should be taken into account. The numeric limit would not treat large and smaller issuers equally.
Q12a: Do you agree with our proposed content and format for summaries?
FSPA does not agree with the proposed content and format for summaries. FSPA sees it absolutely necessary that “other information” is possible to be added to the summary.
Q12b: Are there other pieces of information which should appear in summaries? and are there disclosure requirements in our tables which are not needed for summaries?
FSPA sees it necessary to critically analyse the items proposed to be included in the summary and delete items from the list base on this analyse. The proposed content of the information is way too extensive especially in the section B (issuer and guarantee). With respect to the pro forma financial information it should only be referenced to the base prospectus not be included in the summary. The summary should not lose its task being short, simple, clear and easy for the targeted investors to understand information package. Summary should not replace the base prospectus in investor´s mind as investors should always become familiar with the base prospectus.
Q13: Is there a need to augment Point B.9 with additional disclosure requirements, such as key assumptions, or to state that the forecast is reported on in the main body of the prospectus?
FSPA does not see any need to such augment.
Q14: Do you agree with our proposal for amending Article 3, 3rd paragraph, Prospectus Regulation?
FSPA strongly disagrees with proposed proposal for amending Article 3, 3rd paragraph.
Q15: Could you estimate the change in costs that will arise from the proposals in this document for summaries?
It is not possible to give any specific figure, but FSPA anticipates that in respect of structured products the costs would increase significantly process being also very burdensome.
PROPORTIONATE DISCLOSURE REGIME (ARTICLE 7)
PROPORTIONATE DISCLOSURE REGIME REGARDING CREDIT INSTITUTIONS AND OTHER ISSUERS
Q46: Do you agree with the proposal to require historical financial information covering only the last financial year for credit institutions issuing securities referred to in Article 1(2)(j) of the Prospectus Directive?