On June 2, 2016, ESMA issued a statement (ESMA/2016/902) reminding banks and investment firms of their responsibility to act in their clients’ best interests when selling bail-in-able financial instruments. The statement clarifies how credit institutions and investment firms should apply the requirements under the Markets in Financial Instruments Directive (2004/39/EC) (MiFID) governing the distribution to clients of financial instruments subject to the BRRD resolution regime under the Bank Recovery and Resolution Directive (2014/59/EU).
The statement stresses that firms must comply with their obligations under MiFID and the importance of:
- Providing investors with up-to-date, complete information drafted under the supervision of the compliance function.
- Managing potential conflicts of interest, in particular, when a firm sells its own bail-in financial instruments directly to its customers (self-placement).
- Ensuring the product is suitable and appropriate for the investor, which may entail collecting more in-depth information about the client than usual to reflect the fact a client could lose money without the firm entering into insolvency.
In an accompanying press release, ESMA explained that under the BRRD rules, which came into force in January 2016, firms are likely to issue a significant amount of potentially loss-bearing instruments to fulfil their obligations and raised its concern that investors (in particular retail investors) are unaware of the risks they may face when buying these instruments.