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

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

Madam, Sir,

The Banking and Financial Commission (hereinafter "BFC") is increasingly being approached by requests from investment firms wishing to expand their range of products by including products from Branch 23, with the aim of offering these products for sale and, possibly, 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, in the legal sense, a financial instrument. Nevertheless, it is a product that (from an economic perspective) has the character of an investment and offers the investor the possibility to indirectly invest in financial instruments.

Sale of Branch 23 Products

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

Adequate Organization (Article 62 of the Law)

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

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

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 March 27, 1995, relating to 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 April 6, 1995, regarding operations on financial instruments, and the Law of March 27, 1995, regarding insurance intermediation.

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• the firm itself and the various capacities in which it is authorized to act;
• the services it provides and the costs associated with them;
• the products offered and the risks associated with them;
• the operations performed.

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 related to the approval it holds. For example, wealth management companies and order execution firms 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 incompatible with the provision set forth in Article 79, § 2, of the Law, which characterizes the status of the aforementioned categories of investment firms. Furthermore, the general rule prevailing more and more 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, as with operations on financial instruments, adequately retain 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 operations. As with financial instruments, the administrative organization must enable the investment firm to demonstrate that the rules applicable to Branch 23 products are respected.

Accounting must, as with other activities, clearly establish revenues related to the new activity (specific income and expense account). Regarding the investment firm's internal control procedures, they must be completed to allow monitoring of the activity conducted in Branch 23 products.

An 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 operations on financial instruments, 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 considering the importance of guaranteeing the same treatment to all its clients, the investment firm will also apply these procedures when acting as an intermediary for Branch 23 products. It is indeed possible that it intervenes in this context for a client who also conducts operations on financial instruments.

Parallel Control by the OCA

The control exercised by the BFC 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 BFC and the OCA inform each other of any request submitted by an investment firm seeking authorization to offer Branch 23 products for sale, or to be registered in the register of insurance intermediaries, as well as of the withdrawal of approval or registration in said register.

This circular is addressed to Belgian investment firms and to branches established in Belgium of investment firms subject to the laws of non-European Union member states.

It will also be brought to the attention of branches of investment firms subject to the laws of European Union 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 providing placement advice (on financial instruments) – also intend to provide advice on Branch 23 products must also obtain specific authorization from the BFC (see Article 4 of the Royal Decree of August 5, 1991, relating to 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