On 22 December 2014, the Italian Securities and Exchange Authority (Commissione Nazionale per le Società e la Borsa) (Consob) published a communication concerning the distribution by intermediaries of complex financial products to retail customers (i.e. Communication No. 0097996/2014) (the Communication).

The aim of the Communication is to increase the level of protection of retail customers, who are deemed to be the most vulnerable operators in the complex financial products market.

Indeed, in Consob’s view, the complexity of the financial products means that retail customers are exposed to higher risks and require constant monitoring to ensure that these customers are not exploited due to their lack of market experience.

Consob, in the past, has observed that the transparency requirements imposed by current regulations are insufficient in ensuring full investor protection and preventing distortions in the placement process of the relevant products.

In the Communication, Consob has adopted a non- exhaustive list of complex financial products and has established good practices to which the intermediaries are subject in their relationship with retail customers.

The rules set out in the Communication build on the existing rules of conduct that intermediaries must apply in providing investment services in Italy, found in Italian laws and MiFID implementing regulations. Such rules of conduct apply, inter alia, to EU intermediaries subject to the Italian establishment regime (i.e. having a branch in Italy). Conversely, those rules do not apply to EU intermediaries providing services into Italy which must comply with the laws and regulations of their home State.

The Communication follows two ESMA opinions concerning “MiFID practices for firms selling complex products” published on 7 February 2014 and “good practices for product governance arrangements” published on 27 March 2014.

Specifically, ESMA identifies complex products and recommends that intermediaries adopt good practices when offering these products, to ensure they are in line with the target clients’ profiles and to avoid damaging effects on retail customers.

In the Communication, Consob fully adopt ESMA’s position. In particular, the Italian Authority:

  1. Explicitly advises intermediaries against offering certain complex financial products, outlined in a specific non- exhaustive list, to retail customers. The list includes:
    • Financial products arising from securitisation transactions (i.e. asset backed securities);
    • Financial instruments convertible into shares, upon initiative of the issuer or subject to certain conditions (e.g. Contingent Convertible Notes or financial products qualified as “additional tier 1” under Art. 52 of Regulation (UE) n. 575/2013);
    • Credit-linked financial instruments;
    • Structured financial instruments not traded on trading venues, in relation to which the reimbursement of the sums paid by the investor is not guaranteed;
    • Derivative financial instruments; and
    • Alternative undertakings for collective investment (UCIs);
  2. Reminds intermediaries of their duty to apply criteria of coherence between the products offered and the customers’ profiles;
  3. Reminds intermediaries of their duty to prevent conflicts of interest that can occur in the distribution of complex financial products aimed at increasing the assets of the intermediaries themselves;
  4. Invites intermediaries to eliminate incentives to personnel which could accentuate seller conflicts of interest; and
  5. Invites intermediaries to make use of the same assessment and simulation methods used for internal purposes within their risk management system, when preparing the information to be provided to retail customers during the distribution process.

Where the intermediaries decide not to comply with the Consob’s advice outlined in (a) because they deem that the distribution of complex products is in the interest of the retail customers and that adequate information concerning such products and risks connected with them are provided to investors, other measures, in addition to the measures described in (b) to (e) above, are prescribed aimed at making the distribution compliant with the above mentioned principles.

The relevant decision to distribute the financial products must be taken, on a justified basis, by the top management of the intermediaries, subject to opinions of the controlling corporate bodies and functions.

In any case, the decision to distribute the products should be accompanied by the identification of the relevant investment limits for current and potential customers, taking into account:

  1. The customers’ socio-economic characteristics (e.g. level of expertise, age, minimum assets held by the intermediary);
  2. The relevant quantitative thresholds (e.g. minimum investment thresholds and maximum thresholds of the assets portfolio); and
  3. The modalities of the offer (e.g. online channel only application; advanced portfolio advisory service which also includes (i) periodically monitoring of financial portfolio, (ii) review of the adequacy, (iii) interaction with the customer after aforesaid review; etc.).

Moreover, the intermediaries must provide the client with a disclosure concerning the “unsuitability” for retail customers of the distributed products, according to Supervisory Authority guidelines.

The intermediaries shall carry out specific controls during the entire process of the distribution of complex financial products, to ensure the compliance of the process with the aforesaid principles on a continuous basis.

Consob has established that intermediaries must implement the practices outlined Communication as soon as possible and in any event no later than 30 June 2015, informing the Authority of any decisions and measures that have been adopted.


Recent amendments to the Italian regulatory framework have had a significant impact on the rules concerning the provision of financing activities and the entities to which such activities are reserved in Italy.

In Italy, the provision of financing activities to the public (i.e. towards third parties, on a professional basis) is generally reserved to banks and other authorised entities (i.e. financial intermediaries).

Financing activities include, inter alia, the activity of credit purchasing.

Non-Italian banks and financial intermediaries are entitled to carry out financing activities in Italy, including credit purchasing, subject to specific passporting, licensing and enrollment procedures.

As anticipated, the legislature has introduced certain new rules potentially affecting the above considerations.

In particular, the ‘Competitiveness Decree’ (Decreto competitività) (i.e. Law Decree no. 91 of 2014, as converted into Law no. 116 of 2014), which contains a number of measures aimed at addressing the various  needs of the Italian economy, includes certain provisions aimed at facilitating access to new sources of financing for Italian companies.

According to these rules, the categories of entities entitled to carry out financing activities in Italy have been enlarged so as to include, subject to specific modalities and conditions, insurance companies and securitisation vehicles. These entities are admitted to lend to companies to the extent that:

  • The borrower is identified by a bank or a duly enrolled financial intermediary; and
  • The bank or the financial intermediary identifying the borrower retains a “significant interest” in the financing transaction. For loans made by insurance companies, “significant interest” means an interest equal to at least five per cent of the loan granted by the relevant insurance company. Banks and financial intermediaries will keep the significant interest for the entire life of the loan; unless they choose to transfer the significant interest to other banks or financial intermediaries during the lifetime of the loan. Conversely, the law does not state the threshold for loans made by securitisation vehicles.

In the case of securitisation vehicles, the notes issued to fund financing granted by the securitisation vehicle must be addressed to “qualified investors” only.

In the case of Italian insurance companies, such entities must also (i) have an adequate internal risk and control management systems; and (ii) be adequately capitalised.

To further support lending by insurance companies, the Decree has provided that financing granted by insurance companies falls within the assets that insurance companies may hold as investments for the purpose of complying with their technical provisions (riserve tecniche) requirements.

The Bank of Italy and IVASS (the Italian authority supervising the insurance market) must each issue implementing regulations setting forth the operational limits and the other details applicable to lending by, respectively, securitisation vehicles and Italian insurance companies. In this sense, IVASS has already updated the Regulation no. 36 concerning the investments covering technical provisions (reserve tecniche) of the insurance companies.

In the same perspective, the definition of UCIs contained in the Legislative Decree No. 58 of 24 February 1998 has been amended. In particular, according to this amendment, UCIs, including non-Italian UCIs (irrespective of any passport/ authorisation), may invest in receivables, including those arising from financing granted by the same fund.

Separate to the provisions concerning the financing activities of insurance companies and securitisation vehicles, which expressly qualify as lenders and specify the modalities and conditions according to which they are entitled to grant loans, the above mentioned amendment of the Legislative Decree No. 58/1998 concerning the UCI’s definition is less clear and focuses on the investment activities undertaken.

It has been interpreted as seeking to allow UCIs’ financing activity, but secondary rules to clarify and describe the modalities and conditions of this activity are still missing.

In addition, the rules concerning the reservation of financing activities have not been amended or derogated. This implies, inter alia, that non-Italian banks and financial intermediaries are still subject to specific passporting, licensing and enrollment procedures in order to carry out financing activities with the public in Italy.

In light of the absence of any details on financing activity of UCIs, and the discrepancy between the above mentioned laws, it is reasonable to assume that a non-Italian UCI is entitled to purchase credits (vis-à-vis Italian borrowers) from an Italian bank, subject to specific limits and conditions.

One structure that might considered would be a sub- participation structure involving Italian banks or financial intermediaries, according to which (i) the UCI would enter into a relationship exclusively with Italian bank or intermediary selling the credit, without having any contact with the Italian borrowers and (ii) the UCI would have the right to obtain a reimbursement for the credit provided exclusively from the Italian bank or intermediary.

Alternatively, non-Italian UCIs may enter into a trilateral agreement with the Italian bank or intermediary selling the credits, and the Italian borrowers, according to which Italian borrowers would reimburse the credits directly in favour of the UCI, but the latter would not be entitled to manage the relationship for them (for example, it would not be entitled to carry out actions to force the Italian borrowers to pay, etc.). 

These structures would appear to allow the purchase  of Italian borrowers’ credit by non-Italian UCIs and to trigger the above described Italian regulatory scenario.

It is understood that secondary rules clarifying the scope and the application of the new rules enabling UCIs to lend to companies are needed in order to remove the uncertainties connected with it.