Twin Peaks II: impact on bank liability
The law of 30 July 2013 on the strengthening of the protection of consumers of financial products and services, and the powers of the Financial Services and Markets Authority (FSMA), and containing various other measures1 (Twin Peaks II Law), entered into force on 9 September 2013.2
We summarise below some of the measures contemplated in the Twin Peaks II Law that are aimed at increasing the protection of consumers of financial services and products. The measures will have an important impact on the standards of liability applied and the litigation of claims for mis-selling.
Restrictions on the marketing of products ("product ban") and labelling
The FSMA will be able to (i) ban the marketing or certain forms of marketing of financial products; (ii) impose labels to promote the transparency of financial products, of certain categories of financial products, or of the risks, prices, remunerations and costs related thereto; and (iii) recommend a reference questionnaire for the determination of the investment profile of a consumer of financial products. Measures relating to transparency, through labelling or otherwise, in relation to risks, prices, remunerations and costs may also be implemented by royal decree. The preparatory works refer to the measures of the FSMA in the field of particularly complex structured products.3
Extension of conduct of business rules to insurance companies and intermediaries
The Twin Peaks II Law provides that, as from 1 January 2014, insurance companies are subject to a general obligation to act in a fair, loyal and professional manner in serving the interests of their clients and to provide information to clients that is correct, clear and not misleading. Consequently, all providers of financial products (regardless of whether they are described as a financial instrument or insurance product) will have to comply with the same set of rules. We note however that the implementing royal decrees regarding insurance companies and intermediaries have not been published.
Product knowledge
The Twin Peaks II Law introduces a requirement that everyone who is in contact with investors should have the necessary knowledge to advise on the services and products sold (ie a "know your product" obligation). This requirement applies not only in a MiFID context, but also across products, whether in relation to financial instruments, savings accounts or insurance products. The requirement also applies regardless of the status of the person who is in contact with the client (whether as agent, independent intermediary or employee of the financial service provider).
The knowledge required relates to the essential characteristics of the product and the ability to explain these to the client. The preparatory works indicate that aspects such as whether a product is a fixed income product, whether there is a risk of capital loss, and the legal characteristics of the product are important. However, it is not necessary that the contact person should know or be able to reproduce all the details of a prospectus.
The preparatory works further specify that the scope of the knowledge will vary depending on the products that are offered.
The requirement will be more burdensome where the relevant person offers a broader scale of products. It is the obligation of the relevant institution to ensure that the persons who are in contact with the public have the required essential product knowledge.
The impact of these requirements is increased by the fact that the FSMA has strengthened supervisory and sanctioning powers in this respect.4 For example, the FSMA may exercise its new ability to use "mystery shoppers" to verify how this conduct of business rule is applied in practice.
Civil liability
The rules on civil liability become stricter. A rebuttable presumption of a causal link is introduced with respect to breaches of conduct of business rules: the investor no longer has to prove the causal link between the breach and the decision to enter into the investment. In other words, there is now a rebuttable presumption that the investor would not have concluded the transaction but for the breach of the conduct of business rules by the service provider. In practice, this presumption creates a reversal of the burden of the proof: the financial institution will have to prove that the breach of the conduct of business rule did not affect the consumer's investment decision.
The Twin Peaks II Law also provides for a specific statute of limitation for breaches of conduct of business rules, ie five years as from the date the client becomes aware of the damage or its aggravation without such period exceeding 20 years following the date of the breach.
In addition, if the offer of the investment products or certain other financial products is made without the required licence or without pre-approval of the prospectus (or other required documents), the investor will be able to request the nullity of the investment transaction. Also, the damage caused by the acquisition, the subscription to the financial product or the conclusion of the agreement will be deemed to result from the breach.
Comment
The measures in the Twin Peaks II Law are another example of the increased focus of the Belgian regulator on consumer protection in the financial sector and are part of a wider trend.
The new measures will affect the structuring of products (as the FSMA will obtain the power to introduce product bans) as well as the marketing of products (given the introduction of stricter conduct of business rules and requirements regarding product knowledge).
The FSMA now has strengthened supervisory powers, but as the rules on civil liability become stricter, we would also expect to see more private enforcement (especially once the Belgian legislation on class actions will be introduced in the coming months).
There is no case law yet in which the rules introduced by the Twin Peaks II Law have been applied but early decisions will be closely followed by practitioners.
See also S. Kierszenbaum and W. Van de Wiele, "Belgium" in The International Capital Markets Review, 2013 for a further discussion of these topics (this update is based on this longer text).
Further information
The European Finance Litigation Review is a quarterly publication on recent developments in the finance litigation and regulatory sector in key European jurisdictions. For more information please contact Amy Edwards amy.edwards@alleovery.com.
Footnotes
1. Among other things, the Twin Peaks II Law (i) includes a number of measures that will harmonise at a Belgian level the different rules for the protection of consumers of financial products and services ("level playing field"); (ii) front runs a number of European initiatives in the area of, for instance, insurance mediation and market abuse; and (iii) implements the Omnibus I Directive and the Short Selling Regulation.
2. Subject to certain transitory provisions and further implementing measures.
3. See our previous publication of 3 October 2011 "Belgian FSMA: consultation on distribution of structured products".
4. Further detailed rules relating to the requirement of essential product knowledge can be introduced by royal decree.
