Topic Consumer protection Credit-linked notes: BaFin decides not to prohibit retail distribution
Following a nine-month monitoring phase, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) has decided not to prohibit the distribution of credit-linked notes to retail clients. The Supervisory Authority monitored the issuance and distribution of these products intensively until the end of September 2017, and established that the voluntary commitment made by the German Banking Industry Committee (DK) and the German Derivatives Association (DDV) was broadly adhered to and protected retail investors sufficiently.
In light of the results of the investigation, Chief Executive Director Elisabeth Roegele concludes, "the way that credit-linked notes have developed shows that BaFin can significantly improve investor protection without introducing a prohibition". Between January and September 2017, the Authority monitored a total of 106 newly issued credit-linked notes from a number of issuers, and established that the voluntary commitment made by the certificates industry is being adhered to and that further supervisory restrictions are therefore not necessary at the present time.
With respect to the principles regarding issuance, BaFin carried out checks on, among other things, securities prospectuses and product information sheets and inspected advertising and information material as well as product descriptions on the issuers' websites. In addition, the Supervisory Authority carried out on-site inspections to ascertain whether the principles regarding distribution were being observed, and to this end evaluated investment advice minutes, among other things. While it did find contraventions in isolated cases, these were not of a systemic nature, but rather due to individual wrongdoing.
Due to investor protection concerns, at the end of July 2016 BaFin announced a prohibition of the marketing, distribution and sale of certificates linked to creditworthiness risks to retail clients and gave those in the certificates industry the opportunity to state their position. In response, in mid-December 2016 the DK and the DDV announced a voluntary commitment for the issuance and distribution of credit-linked notes. This commitment provides for improved advice about risks, increases quality control for the selection of the reference entity and restricts the distribution of credit-linked notes to investors with a higher risk appetite. Consequently, BaFin initially deferred the planned prohibition. Now that its intensive monitoring phase has been concluded, BaFin has made a final decision not to introduce a prohibition, but will continue to review adherence to the voluntary commitment as part of its market and product supervision.