The Joint Committee of the European Supervisory Authorities (ESAs) have published a statement on the placement of financial instruments with depositors, retail investors and policyholders (self-placement).
The ESAs have analysed the practices employed by some firms to comply with the new EU capital requirements (Capital Requirements Directive IV, Solvency II and the Bank Recovery & Resolution Directive, as well as the European Banking Authority’s (EBA) ongoing stress test and the European Central Bank’s (ECB) comprehensive assessment). The practices include firms engaging in self-placement (that is, selling to their clients financial instruments that they, or their group companies, have issued and that are eligible to comply with specific EU prudential requirements). These practices may breach some of the rules governing the conduct of firms (set out in the Markets in Financial Instruments Directive (MiFID) and MiFID II), and may result in significant consumer detriment.
Firms are reminded of their responsibility to comply with rules governing conflicts of interest, remuneration, the provision of advice and suitability, and the appropriateness of products. The ESAs also remind firms that they should not allow capitalisation pressures to affect their ability to comply with existing and future EU requirements.
Separately, ESMA has published a statement highlighting the potential risks associated with a newly emerging asset class referred to by most market participants as contingent convertible instruments (CoCos). These are a specific category of instrument issued by firms to comply with their prudential requirements. CoCo structures are highly complex and are non-homogenous in terms of trigger levels, necessary capital buffer levels and loss absorption mechanisms. If they work as intended in a crisis, CoCos can play an important role in inhibiting risk transfer from debt holders to taxpayers. However, it is unclear whether investors fully understand the potential risks and are capable of correctly factoring these into their valuations. ESMA believes that there are specific risks to CoCos and that investors should take these risks into account before investing in these instruments. Also, as investing in CoCos requires a sophisticated level of financial literacy and a high risk appetite, ESMA considers that these may not be appropriate for retail investors.
View Placement of financial instruments with depositors, retail investors and policy holders (‘Self placement’), 31 July 2014
View Statement: Potential risks associated with investing in contingent convertible instruments, 31 July 2014