Belgium: More bans on the distribution of derivative financial instruments to retail clients
Since 18 August 2016 there are new rules governing the distribution of certain derivative financial instruments to retail clients, introduced by a regulation of the FSMA of 26 May 2016 (the 2016 Regulation).
New bans on products and marketing techniques
Two years ago the FSMA banned the distribution of certain financial products to retail clients (the 2014 Regulation), namely:
life settlements or financial products with a return dependent on life settlements;
derivatives based on virtual currencies;
an investment instrument, other than a UCIT, with a return dependent on an AIF investing in one or more non-mainstream assets; and
class 23 insurance contracts linked to an internal fund that invests in one or more non-mainstream assets or with a return dependent on an AIF investing in one or more non-mainstream assets (such as commodities, artworks, wine or whisky).
The 2016 Regulation is different because it combines a ban on even more products with a prohibition on the use of certain aggressive, inappropriate marketing techniques. Both the ban and the marketing prohibition apply equally in the context of the distribution of derivatives via electronic trading platforms to retail clients in Belgium. However, the product ban only applies to certain types of OTC derivatives, while the prohibition against the use of certain marketing techniques applies to all OTC derivatives (referred to in Article 2(1)1°d) to j) of the Financial Supervision Law, comparable to a great extent to the derivatives listed under points (4) to (10) of Annex 1 Section C MiFID).
Newly banned products
The newly banned products are certain types of OTC derivatives that are distributed to retail clients via electronic trading platforms:
derivative contracts with a maturity of less than one hour; and
derivative contracts with leverage, such as CFDs and rolling spot forex contracts.
Prohibited marketing techniques
rewarding clients for introducing new clients or recommending products or related services;
providing fictitious gifts or bonuses, ie gifts, bonuses or amounts that a client can only benefit from if he actually enters into a transaction;
using external call centres for cold calling of clients or potential clients;
providing to software service providers or to any other third party playing a role in the distribution process, a remuneration dependent on the amounts collected or gained by the firm or lost by the clients; and
accepting credit card payments.
Financial institutions and customers covered by the 2016 Regulation
The rules in the 2016 Regulation apply to distribution in Belgium or distribution to the Belgian public. From the distributor's perspective, this means that the rules apply to any person or entity acting in a professional way regardless of its nationality or place of establishment or residence, under the sole condition that it targets one or more consumers in Belgium.
The 2016 Regulation also applies to offers made to the public. In the Q&As published on its website, the FSMA includes the warning that it will refuse to approve prospectuses for transactions that are forbidden under the 2016 Regulation.
On the client side, the FSMA combines the concept of "consumer" under the consumer protection legislation and the concept of "retail client" under MiFID. The distribution to legal persons and companies is thus out of scope. By contrast, the distribution to a natural person carrying out a commercial business, trade or professional activity, but acting in the capacity of managing his or her own private assets, is in scope of the 2016 Regulation. However, if that same person has asked to be treated as a professional client in the context of the provision of services under MiFID, that person will lose the protection provided by the 2016 Regulation.
Distribution means presenting the product in whatever way, with a view to encouraging the client or potential client to purchase, subscribe, adhere to, accept, sign up for or open the product.
Whether the distribution is in Belgium will be assessed by the FSMA based on factual elements in the distribution process such as: the presence of information about the Belgian legal and tax regime; a reference to contact persons in Belgium; the absence of a disclaimer stating that the distribution is not addressed to the Belgian public; the languages used; the ability of Belgian clients to subscribe online; the announcement of the intention to offer investment services in Belgium; the use of advertisements via Belgian media or even just the fact that a distributor has a large number of Belgian clients.
Enforcement by the FSMA
Breaches of the rules in the 2016 Regulation may lead to administrative measures (such as a warning, order or penalty) or to sanctions (such as monetary fines).
The FSMA refers customers who might have complaints about foreign providers in the context of the 2016 Regulation to the competent foreign supervisor. It is not clear what administrative actions may then be taken against such foreign institutions.
This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch email@example.com, or tel +44 20 3088 3710.