November 2015
corporate & commercial LAW
FINANCIAL PRODUCTS: ORDER ECC/2316/2015 OF 4 NOVEMBER ON INFORMATION OBLIGATIONS AND CLASSIFICATION OF FINANCIAL PRODUCTS
On 5 November 2015, Spain’s Official State Gazette published Order ECC/2316/2015 of 4 November on information obligations and the classification of financial products, which will enter into force on 5 February 2016 (the “Order”).
The Order introduces information and classification obligations that must be fulfilled by entities that market certain financial products or render investment services. The aim of the Order is to ensure that retail clients are provided with pre-contractual documentation that follows a standardised format and includes an indicator of the product’s level of risk. This documentation must be provided for products to which the Order applies and is additional to that which must be provided pursuant to the legislation currently in force.
1. FINANCIAL PRODUCTS THAT FALL UNDER THE SCOPE OF THE ORDER
The Order applies to the following financial products:
- Financial instruments included in article 2.1 of the Securities Market Law1.
- Bank deposits, including, among others, sight, savings and term deposits.
- Life insurance products with a savings element, including assured savings plans.
- Individual and group pension plans.
The Order does not apply to the following financial products:
- Those subject to Regulation (EU) No 1286/20142 (known as PRIIPs), such as life insurance products with an investment element and structured products and structured deposits, given that these are subject to specific information obligations as from 31 December 2016.
- Public debt, as it is deemed a highly liquid and solvent asset for the purposes of prudential regulation.
- Collective life insurance implementing pension commitments, corporate pension plans, pension plans set up through insurance contracts for the coverage of risks and benefits of the plan, as these are not aimed at the retail market, as well as the types of life insurance provided for in article 3 of Order ECC/2329/2014 of 12 December, which regulates the calculation of the expected profitability of life insurance.
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2. entities THAT FALL UNDER THE SCOPE OF the order
The Order applies to the following entities:
- Investment firms and entities authorised to render investment services, including individuals having the condition of financial advisory firms, and entities authorised to render certain investment and ancillary services.
- Credit entities.
- Credit finance companies.
- Insurance companies.
- Pension fund management companies.
- The foreign equivalents of the above entities when they operate in Spain through a branch, an agent or under the freedom to provide services.
Originating entities and issuers of the financial products listed in the previous section will also be subject to the information and classification obligations under the Order (described below) when investment services are rendered in connection with such products or when such products are marketed.
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3. INFORMATION AND CLASSIFICATION OBLIGATIONS FOR FINANCIAL PRODUCTS
3.1 RISK INDICATOR
The Order classifies financial products into six classes according to risk. Factors used to classify products include whether or not the capital is guaranteed, the term during which the principal must be repaid and the credit quality of the product or, if applicable, the issuer.
The risk indicator must be graphically represented using the symbol set out in the schedule to the Order. The colour of the symbol identifies the product’s risk according to a six-colour traffic light system. Green is used for the lowest-risk products and red for highest-risk products.
3.2 LIQUIDITY AND COMPLEXITY ALERTS
The risk indicator, which must always be provided, should be accompanied by a liquidity or complexity alert when applicable. These alerts take the form of the symbols included in the schedule to the Order. The liquidity alert will be represented through a padlock symbol and the complexity alert, through an exclamation mark.
These alerts should be included when any of the circumstances provided for in the Order arises. The existence of a repayment commitment, the fact that a product is traded on a regulated market, a multilateral trading facility or an organised market or trading system, or the existence of fees or penalties for early repayment of the principal are examples of circumstances that would warrant the inclusion of a liquidity alert. A complexity alert should be included when a product is considered complex by the Securities Market Law, the Bank of Spain, the National Securities Market Commission or the Directorate-General of Insurance and Pension Funds.
3.3 FORMAL REQUIREMENTS
The risk indicator and, if applicable, the liquidity and complexity alerts must be included in
- marketing communications for a financial product that include specific information about its characteristics and risks, and
- the general description of the nature and risks of a financial product that should be provided to clients or potential clients before it is acquired pursuant to the applicable legislation.
These obligations will only apply to entities when they
- render investment services, except for discretionary portfolio management, or
- market any of the financial products referred to in the previous section to retail clients, including potential clients, directly or through other sales channels in Spain.
1.- Consolidated Text of the Securities Market Law, approved by Royal Legislative Decree 4/2015 of 23 October.
2.- Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products.
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