Spanish Banking Association

In Spanish Banking Association’s understanding, product intervention regime implies a serious restriction of the free functioning of the markets and the freedom to conduct business. Consequently, such regime should be considered as a last resort mechanism, only to be used in residual and specific cases.
In that sense, the Spanish Banking Association believes that the criteria and factors proposed give rise to a great legal uncertainty as it mainly uses open - qualitative criteria and does not establish specific guidelines which should govern the decision of an authority. Furthermore, we believe that the main goal is how to quantify or determine the level where the appropriate NCA could estimate that has to exercise their product intervention power, without creating a regulatory arbitrage possibility between two or more member states. If that is not the case, competent authorities may be empowered with discretionary measures that may be prejudicial for market confidence and stability for the EU internal market. Examples of these situations that are common to the ESMA and EBA criteria are:
-Factors like “degree of complexity”, “degree of innovation”, or even “the notional value”, have to be clearly defined with quantitative measures rather than subjective criteria that should be taken into account by EBA or, NCA.
-Intervention criteria should not be based on permitted activities: references to client, wealth or incomes should be deleted, as there is no restriction to sell depending on the wealth or incomes of clients.
-The Consultation paper should not include criteria that investment firms do not have to consider when distributing their products. For example, “core financial objectives”, that only should be considered when providing investment advice.
-Some references may be harmful for market stability and may jeopardize the free effective price formation. In particular, we consider that the “financial situation of the issuer or any guarantor” may negatively impact the basis of market functioning, as this is a criterion that could result in the issuer/guarantor being expulsed of the market (and financial situation will already be considered in terms of pricing and conditions of the issuance).
- The degree of disparity between expected return or benefit for investors and risks of loss is highly dependent on market conditions, so it will vary over time and should be linked to comparable products available to the clients at the same time.
- Concerning the degree of innovation, we believe that a special care is to be taken in order to allow best practices flow and the innovation should be considered negatively only if combined with other elements of danger.
- Regarding the threats to the orderly functioning of financial markets, we would like to point at the susceptibility of being used for purposes of financial crime. Although we believe that it is a legitimate aim, we consider that the deposit itself cannot pose a threat in this sense, but the persons that could be investing in it, at the same time than other regular investors. So the objective should be addressed by other regulations that focus on the activity of the persons and not in the product itself.
In general terms, we consider that listing examples of activities is not coherent with the exceptionality of the measure that is envisaged. We would recommend to adopt a more restrictive approach and include quantitative parameters in order to assess whether a specific deposit could either pose a “significant investor protection concern, a threat to the orderly functioning and integrity of financial markets or to the stability of the whole or part of the financial system in the Union”. This quantitative approach should reflect the exceptionality of the cases that it needs to address and be established at a level that is reached only in extreme cases.
Concerning modifications introduced by EBA on specific issues of structured deposits, we would like to point that consistency among both kind of products is very important, as there is a high amount of substitutability between them. So coordination between both regulators is desirable and divergences should be limited only to the specific features where they differ.
- Specifically, EBA must take into account that intervention powers for structured deposits must have a more lax approach than for investment products considering that they are products, given their nature, where the devolution of 100% investment is assured at maturity. Therefore they introduce lower risk in the system as for investors and it would not be proportional to introduce the same level measures as for investment products.
- We doubt that the different requirements concerning transparency on multiple layers of costs or return calculation complexity should be different in a deposit than in other financial instrument. Moreover, there are general statements about complexity that should be taken into account carefully because in certain cases higher complexity can contribute to lower risk (in some cases of path dependency, the client can be less exposed to the risk of the price movement at just one point in time).
- Considering the particular features or the underlying components, we believe that the fact that the underlying is no longer available should not lead to intervention, as it could generate a detrimental effect on the financial markets. The underlying substitution could be a better way to solve the situation in these cases.
- Regarding the cases where the financial instrument poses a high risk of disruption to financial institutions, we do not see the necessity to include more considerations such as the hedging strategy, the relevance of the deposit as a funding source or the reputational risks. These are banking risks addressed by other regulations and need to be considered on a portfolio basis and not in relation to a single product.

Listing these characteristics as criteria to be considered to restrict the sale of deposits may introduce subjectivity and lead to divergences between national authorities.

Regarding the criteria and factors proposed for intervention powers, we would like to take here an support the comments made by the Securities and Markets Stakeholder Group, in their advice to ESMA regarding their consultation paper ESMA/2014/549 which we reproduce here:

108. The SMSG does not agree with “the criteria and factors to be taken into account by competent authorities in determining when there is a significant investor protection concern” proposed by ESMA in its draft Technical Advice, nor does it agree with their ranking. In addition, the criteria are overly complex and numerous. There are 50 “detailed elements” which are being given as examples of how criteria and factors should be interpreted by a NCA. Although this is required by MiFIR and these elements are provided in order to clarify how the NCAs should use these new powers, this list does not provide a lot of legal certainty for users.
109. All of the first six criteria for investor “concern” as stated in Point i, ie” The degree of complexity of the financial instrument or type of financial activity or practice “ are not about likely detriment/concern in our view, but about complexity which is a quite a different issue. Aspirin is a very complex product. A car is also a very complex product. But the services they deliver to the consumer are quite clear and easy to understand, and they both - by the way – have been pre-approved by the supervisors. This confusion and amalgamation between investor concern/detriment with “complexity” is unfortunate. What is important is that the investment proposal is clear and understandable and actually this is a requirement of MIFID I and II. Whether the “engine below the hood” is complex or not is not the main issue for investor and consumer detriment although there must be transparency on this point and there are issues of financial stability to such instruments (eg leveraged ETFs). At the same time, the SMSG acknowledges that complexity can be a relevant condition when the ability of the financial instrument to fulfil the stated objectives of the investment product are not easy to understand for the retail investor, especially on a medium to long term horizon, as it bears on potential for misselling and a product not performing as it should.
110. Therefore, the SMSG would very much like ESMA to reduce this confusion on the issue of complexity. The SMSG acknowledges that complexity should remain one of the “significant investor protection concern” criteria and factors, and thus retain a relatively high level of priority, but rather in the sense of the complexity for the investor to be able to understand whether the investment product has the inherent capacity to fulfil its stated objectives as initially planned.

The SMSG also supports better defining the criterion currently ranked as number 10: “probability, scale and nature of any detriment, including the amount of loss potentially suffered”.
112. Next to toxicity (the high probability of not achieving stated/advertised goals and/or of destroying the real value of savings), the number two criterion should be the magnitude of total charges and commissions borne by the client directly or indirectly, including disclosed and undisclosed charges, including the various layers of costs (for example in a unit-linked insurance contract). Ample evidence and research show that poor and below-expectation returns are often correlated to the level of charges and costs. Part of this criterion is captured by ESMA’s Technical Advice proposal in criterion i. (b) (multiple layers of costs and charges) and iv (b) (any hidden costs and charges).
113. Also, in the proposed Technical Advice there is no definition at all of what is an “investor protection concern”. There is also no definition of what is to be considered an investor “detriment”, other than mentioning under ii. The size of the potential problem or detriment . “..including the amount of loss potentially suffered..” (TA 4. ii (d)). The SMSG believes that it is necessary to define these key notions, especially when one observes that investor concern and detriment are being not only mixed up but also confused with the quite different notions of “complexity”, “innovation”, “leverage” and “risk”.
114. Financial health product intervention (just as is the case for physical health products) should concentrate first and foremost on toxic products. Toxic investment products are the ones where the ex ante probability of achieving either the stated investment objective and/or a real positive return is low. Evidence and research show that the manufacturer and the distributor are most often aware of these probabilities although they are almost never disclosed to the clients. For example, a retail equity “index” fund” that actually underperforms its index benchmark by thousands of basis points after only a few years, and is therefore very likely to deliver a negative real return over the mid and long term is certainly a toxic product that should disclose a clear warning and not be promoted to as an “index” tracking fund to individuals.

Finally, we understand that when the intervention powers are already introduced in other legislative initiatives they should not give rise to additional enforcement actions.
No. More than new criteria or factors, we understand that quantitative and objective criteria should substitute the one proposed.
Patricia Rodriguez
S