Circular D4/EB/2002/1 on the Sale of Branch 23 Products by Investment Firms

BANKING, FINANCIAL AND INSURANCE COMMISSION Prudential supervision of investment firms Louise Avenue 99, B-1050 Brussels telephone 02/535.22.11 - fax 02/535.23.08 Brussels, 17 April 2002. CIRCULAR D4/EB/2002/1 TO INVESTMENT FIRMS AND PLACEMENT ADVISORS

Madam, Sir,

The Banking, Financial and Insurance Commission (hereinafter "CBF") is increasingly receiving requests from investment firms wishing to expand their product range by including Branch 23 products, with the aim of offering these products for sale and, potentially, providing advice on these products.

A Branch 23 product is an insurance product, specifically an individual life insurance policy linked to an internal investment fund that carries no yield guarantee. A Branch 23 product does not constitute a financial instrument in the legal sense. However, it is a product that (from an economic perspective) has the character of an investment and offers the investor the possibility to invest indirectly in financial instruments.

Sale of Branch 23 Products

Pursuant to Article 75 of the Law of 6 April 1995 on secondary markets, the status of investment firms and their supervision, intermediaries and placement advisors (hereinafter "the Law"), an investment firm wishing to offer Branch 23 products for sale – without prejudice to its registration with the Office for the Control of Insurance (hereinafter "OCA") in the register of insurance intermediaries¹ – must obtain specific authorization from the CBF for this purpose.

Adequate Organization (Article 62 of the Law)

− Introduction The CBF requires that an investment firm requesting such authorization specify its project and the measures and procedures that will be put in place to ensure an appropriate organization for the activity it intends to carry out. This circular recalls the important aspects and criteria on the basis of which the CBF will verify compliance with the adequate organization requirement referred to in Article 62 of the Law.

− Policy In order to comply with the obligations incumbent upon it under financial legislation and insurance legislation², the investment firm will ensure that its policy and procedures regarding the information it provides to its current and future clients are adapted concerning:

1 Indeed, anyone who, as an intermediary, intends to offer for sale or sell to the public a Branch 23 product, falls within the scope of the Law of 27 March 1995 on insurance intermediation and the distribution of insurance, and must therefore be registered in the register of insurance intermediaries maintained by the OCA. 2 See Article 36 of the Law of 6 April 1995 regarding transactions in financial instruments and the Law of 27 March 1995 regarding insurance intermediation.

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• the firm itself and the different capacities in which it is authorized to act;
• the services it provides and the associated costs;
• the products offered and the risks associated with them;
• the transactions carried out.

The firm will also ensure compliance with the regulations applicable to the offer of specific services or products (in this case, those of Branch 23).

Finally, the investment firm must take into account any limits linked to the approval it holds. For example, wealth management companies and order execution firms for financial instruments are not authorized, pursuant to Article 79, § 2, of the Law, to receive funds and financial instruments belonging to investors. The receipt, as an insurance intermediary, of premiums paid by clients in the context of purchasing Branch 23 products is therefore not compatible with the provision set out in Article 79, § 2, of the Law, which characterizes the status of the aforementioned categories of investment firms. Furthermore, the general rule prevailing increasingly in the insurance sector is that the policyholder pays premiums directly to the insurance company. It is therefore logical that this modus operandi also be retained as the general rule applicable to stock exchange firms acting as insurance intermediaries.

− Administration, Accounting and Internal Control The investment firm must integrate the new activity into its organization and internal control. Regarding administration, the investment firm must, just as for transactions in financial instruments, adequately retain the documents and information necessary on Branch 23 products (such as, for example, a copy of the insurance contract, client identification, the composition of the portfolio in Branch 23 products, information provided by the insurer to the policyholder) in order to have, for each Branch 23 product, a file containing all intermediation transactions. As with financial instruments, the administrative organization must allow the investment firm to demonstrate that the rules applicable to Branch 23 products are respected.

Accounting must, as for other activities, allow for the clear establishment of revenues related to the new activity (specific income and expense account). Regarding the investment firm's internal control procedures, they must be supplemented to allow for the monitoring of the activity carried out in Branch 23 products. The investment firm using delegated agents must ensure that these agents act in accordance with its policy, organization, and procedures concerning Branch 23 products.

− "Know-your-customer" Procedures In application of various legal provisions, including those relating to conduct rules and the prevention of money laundering, the investment firm must have, for its financial instrument activity, procedures aimed at ensuring good knowledge of the client and involving: i) client identification;

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ii) the collection of information on the client's experience, competence, and financial capacity as well as on the risks they are willing to take; iii) the determination of the client's investment objectives; iv) the use of this information based on the services and products provided.

Given the operational integration of the new activity into its organization and with regard to the importance of guaranteeing the same treatment for all its clients, the investment firm will also apply these procedures when acting as an intermediary in Branch 23 products. Indeed, it is possible that it intervenes in this context for a client who also carries out transactions in financial instruments.

Parallel Control by the OCA The control exercised by the CBF on the investment firm takes place in parallel with the control exercised by the OCA on Branch 23 products and on registration in the register of insurance intermediaries. This process implies that the CBF and the OCA inform each other of any application submitted by an investment firm seeking to offer Branch 23 products for sale and/or to be registered in the register of insurance intermediaries, as well as of the removal of approval or registration from said register.

This circular addresses Belgian investment firms and branches established in Belgium of investment firms subject to the law of non-EU member states.

It will also be brought to the attention of branches of investment firms subject to the law of EU member states, by separate letter requesting them to ensure the application of rules of general interest (information exchange, "know-your-customer" procedures) when offering Branch 23 products.

Placement advisors established in Belgium who – in addition to placement advice (on financial instruments) – also intend to provide advice on Branch 23 products must also obtain specific authorization from the CBF (see Article 4 of the Royal Decree of 5 August 1991 on wealth management and placement advice).

A copy of this circular is sent to statutory auditors.

Please accept, Madam, Sir, the expression of our distinguished sentiments.

The President, E. WYMEERSCH