On 20 May 2014, the Royal Decree of 24 April 2014 approving the regulation of the Financial Services and Markets Authority (the "FSMA") banning the marketing of certain financial products to retail clients (the "Regulation") was published in the Belgian State Gazette.
Pursuant to the Regulation, the marketing of certain financial products to retail clients in Belgium will be banned effective 1 July 2014.
The Regulation was adopted following the revelation during the financial crisis that consumers had acquired financial products which were not suited to their needs or without the provision of adequate information. The Regulation constitutes yet another step by the FSMA towards a more transparent and simpler range of financial products. The first step in this direction was the (voluntary) moratorium established by the FSMA on the distribution of particularly complex structured products. Distributors that sign on to the moratorium commit not to distribute structured products which do not meet the applicable criteria.
The Regulation applies to financial products based on so-called non-mainstream or non-standard assets. At a time of low interest rates, such products are often claimed to offer both security and a high return. In reality, these products offer high risk, little liquidity and considerable complexity for retail clients.
The Regulation thus bans the marketing of several classes of products:
- Financial products that depend on a life settlement, in other words traded life assurance policies. Such products confer on the buyer a right to insurance proceeds upon the death of the insured. The return depends in part on when the insured person dies. Apart from ethical considerations, these are complex and risky financial products, ill-suited to retail clients.
- The Regulation also applies to products consisting essentially of derivatives based on virtual currencies such as Bitcoin. The FSMA and the National Bank of Belgium recently published a warning containing a non-exhaustive list of risks associated with virtual currencies, including transaction risk, the risk of hacking of the virtual money platform, exchange rate risk, and the absence of a legal guarantee that the virtual currency can be exchanged for its face value. Investing in derivatives of virtual currencies can heighten these risks through potential gearing effects.
- The ban also applies to notes as well as class 23 insurance products whose return depends on an alternative investment fund or internal fund investing in non-standard assets. Non-standard assets are defined by the Regulation as assets which do not fall into the investment categories open to Belgian public undertakings for collective investment or Belgian undertakings for collective investment in debt. They include commodities, works of art, and consumer goods such as wine or whisky. Indeed, such speculative products are generally opaque, illiquid and difficult for retail clients to value.