EU Prospectus Regulation Conference: key takeaways
Esma and the European Commission on the progress of the consultation on the Prospectus Regulation Level 2 measures
- Johan van Gruijthuijsen, policy officer of the prospectus team, securities markets unit, European Commission updated the audience on the Commission’s progress surrounding level 2 measures.
- Discussing summaries, he indicated that Esma must come up with ideas for the summary of the EU prospectus, which has a maximum of seven pages. Must create one that stays below that.
- Moving forward, once technical advice has been received in March next year, the Commission will draft delegate act that will be prepared and discussed with member states. Its intention is to draft one single delegated act rather than multiple delegated acts.
- The delegated act will be part of Esma’s feedback mechanism, allowing stakeholders the opportunity to comment on the final draft before it is adopted. The deadline is to adopt the delegated act before January 31 2019.
Regulators’ feedback panel: national regulatory authority views on Level 2 and the impact of Brexit
- Senior figures from French, Irish, Dutch, German and UK regulators shared their experiences working with level 2 measures.
- Most agreed that the risk factors section should be slimmed down. “Numerous boilerplate pages are not helpful,” said one speaker. “We must focus on the relevant risks instead.”
- France’s AMF representative discussed the Universal Registration Document, a policy suggestion at European level, and a long-standing feature of French documentation policy.
- It is an optional, specific registration document that contains legal, financial accounting information. It is multi-purpose and not only for the prospectus but also as a single vector of communication for the company. While popular in France, other panellists questioned its applicability across non-equity instruments.
- Some argued that they view equivalent outcomes as the most important factor, as opposed to doing everything in lockstep.
What are the key concerns for industry with the Prospectus Regulation and related legislation?
- The prospectus regime has been constantly evolving since it came into effect in 2003 and was reviewed in 2008, but the regime for wholesale investors remains broadly unchanged.
- One of the main changes is the distinction between wholesale and retail investors – it’s important for some issuers to have the flexibility to offer securities to qualified investors (QIs) only, subject to lighter disclosure requirements (in the case of subordinated securities, CoCos and equity conversion products for instance, which aren’t suitable for retail investors).
- Some jurisdictions outside of the EU are gaining market share because of their ability to cater to specific needs or securities (Switzerland is seeing a surge in the listing of convertibles, for instance).
- The consensus in the industry is that a prospectus needs to contain only the information that is material to a particular set of investors. Issuers that need to create a prospectus are those issuing debt for the first time, or those in challenging markets or securities.
- “I question whether retail investors can or want to read a long prospectus because of the length and level of detail/sophistication,” said one panellist. He added: “The 100k denomination on offering has acted as a substitute for sophistication in the past few years.”
How will regulated markets be affected by the new PR, Priips, Mifid II product governance, Brexit, and other upcoming regulation? Views from Ireland, the UK and Luxembourg
- A prospectus rules fatigue has set in among stock exchanges, many of which have been dealing with iterations of the rules for well over a decade. The absence of securities litigation suggests the market doesn’t need further safeguards.
- The EU Omnibus II proposal, which passes authority for prospectus approval from NCAs to Esma, was deemed unhelpful.
- NCAs in Europe concerned with the DCM have over the years built up experienced and competent teams that allow them to respond quickly to market needs. Issuers know there are competent authorities when it comes to approving debt prospectuses. “So this proposal is a solution to a problem that is not there. It won’t add value to issuers or investors,” said one speaker.
- Many exchanges believe that US issuers are choosing to bypass the European listing process, something that has become more pronounced in the last 12 months since the introduction of the MAR. Latin American issuers are also now choosing Singapore over Europe.
- Speakers discussed product governance, and praised the ICMA position of trying to harmonise the approach to product governance, coalescing all industry parties to achieve consensus.
Understanding the interrelationship between Mifid II and the Prospectus Regulation
- Issuers now don’t just need to think about what product information they should disclose to investors, but also about whether the product they have designed is suitable for particular investors.
- With Mifid II a key focus for many who are also responsible for responding to the Prospectus Regulation, the session explored the interconnectedness of the two areas.
- The regulators are keen on the Capital Markets Union, but that is to be balanced with Priips, product governance rules and the Prospectus Regulation.
- Product governance is new to the Mifid regime. It imposes a holistic view across the whole life cycle of the product, including post-sale responsibilities.
- Exchanges active in professional-only markets are facing challenges around this when selling to private banks that wish to then sell onto retail – there is disconnect and potential for risk.
- Many of the private banks will be selling to private investors, notwithstanding that they are high net worth. On the private bank side there typically aren’t distribution agreements in place.
- There are challenges around extraterritoriality. Most distributors in Asia have no formal arrangement with their European distributor. One bank said that it had 800 relationships in place, some dormant, some active.
Demystifying Priips - an essential and practical guide to the latest position
- From 2018, any investor receiving a structured product should receive a key information document (KID), in their own language. The perimeters around what constitutes a Priip are not clear and delineated because the definition is not precise. Some conclusions can be drawn from level 1 and 2 guidance and Q&As: that structured deposits are in and traditional deposits are out for instance.
- Each institution must take a risk-based decision and then follow through with risk committees and product governance teams internally.
- ICMA has suggested applying a legend that states that the issuance is not for retail – but this isn’t always clear cut on the basis that a private bank sells onto retail.
- All derivatives require a KID, regardless of whether the product is for hedging or investment purposes. There are implications for many markets, including Scandinavia where OTC investors are considered retail.
- Guidance given by the Commission in July 2016 on discretionary wealth managers which hasn’t been confirmed in a formal Q&A states that if a discretionary wealth manager is making a decision on behalf of retail you should still consider them an institutional.
- Manufacturers and distributors are not always easy to identify. Manufacturers are the key party with the obligation to produce the KID and any translation. The definition of managers in level 1 is not easy to interpret.
- Parties need to examine existing and legacy products with regards to KIDs, regularly update the document and also be mindful of local language requirements.