Order ECC/2316/2015 of 4 November on Information and Classification Obligations for Financial Products

OFFICIAL STATE GAZETTE
No. 265 Thursday, 5 November 2015 Sec. I. Page 104567
I. GENERAL PROVISIONS
MINISTRY OF ECONOMY AND COMPETITIVENESS
11932 Order ECC/2316/2015, of 4 November, relating to information and classification obligations for financial products.
I
The existence of true, sufficient, and understandable information about the products and services offered by financial entities to their customers constitutes one of the basic principles of Financial Market Law. This elementary principle acquires even greater importance the more sophisticated and complex the goods and services offered to customers are. For this reason, one of the cross-cutting and priority objectives in the regulation of financial markets has been precisely to guarantee that customers of financial services have all the necessary information to form a value judgment on the investment services offered and to understand the risks associated with them. However, despite the efforts made both at the national level and within the European Union, reality demonstrates that the lack of availability of sufficient and comparable information, as well as the confusing or incomplete presentation of information about financial products and services, continues to be one of the greatest concerns of financial customers. It is true that the various protective norms approved in recent years have significantly increased the information that must be made available to the customer and have established the obligation that such information be in writing, thereby contributing greatly to ensuring that customers receive the necessary information to contract financial products and services. However, the large amount of pre-contractual information that must sometimes be made available to customers or potential customers, and the absence of a common format for its presentation, constitute two factors that hinder the adequate understanding of the products offered and their comparison with others. II Certainly, the current regulation, both banking and securities market, or financial-actuarial, establishes pre-contractual information with notable intensity, although in a partially fragmented manner. Furthermore, this set of norms responds, in general, to the type of "product regulation" that seeks to unify the requirements that certain financial products must meet, so that the specific information obligations vary considerably between products. A brief reading of the applicable regulations regarding these information obligations reveals that there are relevant differences regarding the information to be published or provided for each product, its method of presentation, and the medium and timing of its transmission to the end customer. To this must be added that, on many occasions, information is practically provided without a homogeneous format, in excessively technical language, or that pre-contractual and advertising documents contain too much information and are drafted and presented in such a way that it is difficult to distinguish the most relevant information within them. All of this diminishes the effectiveness and utility of such information, insofar as it is complicated for the customer to adequately understand the product or service offered, compare it
with others of a different contractual nature but similar investment function, adequately understand the risks it entails, and distinguish its main elements from the accessory ones. cve: BOE-A-2015-11932 Verifiable at http://www.boe.es

OFFICIAL STATE GAZETTE
No. 265 Thursday, 5 November 2015 Sec. I. Page 104568 III The aforementioned deficiencies have highlighted the need to provide financial customers with standardized pre-contractual documentation that exposes, in an easily understandable and visual manner, the essential information about each product and does so in a single homogeneous format and through a common graphical representation system. However, it is not a matter of these new tools replacing the mandatory pre-contractual information. The information required by current regulations continues to fulfill an essential function insofar as it allows acquiring a deeper knowledge of the specific product or service offered and, once acquired, that information comes to delimit the obligational content of the contract in question. Therefore, it is important that these new tools complement the current pre-contractual documents, without replacing them. Precisely this was the intention of the European legislator when approving Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs). This regulation, applicable from 31 December 2016, creates a key information document that must be prepared by originators of packaged products or insurance-based products with a homogeneous format and content, and regulates its supply so that they can understand and compare the fundamental characteristics and risks of such products. IV Also in Spain, steps have been taken to ensure greater protection for the financial customer by public authorities. A first step is found in the report approved by the Subcommittee on transparency in the information of financial products and mortgages of credit institutions, constituted within the Commission of Economy and Competitiveness of the Congress of Deputies in October 2013, in which it is highlighted that "what is important is not to provide a lot of information but that which is necessary for the customer to know the scope of what they are signing" and it concludes that "the necessary legislative reforms must be adopted to, in accordance with the emerging European regulations [...], limit pre-contractual or contractual information to that which is necessary for the understanding of the product, standardizing the form of its presentation through a specific typography, with unequivocal warnings of those risks inherent to the product being contracted." Likewise, with regard to investment products, the report recommends that "prior to their commercialization, products must be classified by risk and complexity. This classification, to be more graphical, could be made using colors." In this regard, the National Securities Market Commission (CNMV) recently submitted for public consultation a draft circular on warnings relating to financial instruments that incorporated "a system to warn retail customers about the risk and complexity of financial
instruments in a very simple and graphical way through a risk indicator that is complemented, where appropriate, with separate alerts regarding liquidity and complexity." The draft circular included within its objective scope of application all financial instruments of Article 2 of Law 24/1988, of 28 July, on the Securities Market, with the exception of participations and shares of collective investment institutions. In this sense, it is important to highlight the correctness and timeliness of the aforementioned draft circular, which, by developing this certainly innovative information instrument, adequately responds to the growing variety and sophistication of the financial instruments to which retail investors have access. However, to guarantee the full cross-cutting efficacy of this instrument in all savings and investment financial services and products, it is considered essential to extend this classification system not only to the financial instruments referred to in Article 2 of the consolidated text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of 23 October, but also, in general, to all other investment and savings products and services available to retail investors in their banking entities or insurance companies. For this reason, it is necessary to overcome the restrictions inherent to the competence scope of the circulars of the National Securities Market Commission and extend the application of this standardized pre-contractual information document, both to bank deposits and to insurance products with a savings purpose, and to individual and associated pension plans. Consequently, in accordance with the legally established order of distribution of competences in political-financial matters and with the principle of normative hierarchy, the establishment of a common system of homogeneous information for all investment and savings products must be carried out through this ministerial order. This system, although, obviously, it does not imply any guarantee on the final result of the investment, will undoubtedly constitute an additional information tool for the investor that is extremely useful. cve: BOE-A-2015-11932 Verifiable at http://www.boe.es

OFFICIAL STATE GAZETTE
No. 265 Thursday, 5 November 2015 Sec. I. Page 104569 V This ministerial order is structured in three chapters and an annex. Its drafting has been guided by three configurative principles. First, the principle of transversality, according to which the standardized information and classification system must be prepared for all financial products, whether banking, securities market, or insurance and pension plans. Second, simplicity, so that the information offered helps customers or potential customers to compare different products and understand their characteristics. And finally, homogeneity, so that, in order to avoid divergences and improve the protection of financial customers, the minimum required information is prepared and graphically represented in a single standardized format. Well, taking into account these three principles, Chapter I regulates the objective and subjective scope of application of the ministerial order. Regarding the products to which it applies, the order includes the financial instruments collected in Article 2 of the consolidated text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of 23 October, bank deposits, life insurance products with a savings purpose, and individual and associated pension plans. However, the following products are excluded from the scope of application of this order: those included in the scope of application of Regulation (EU) No 1286/2014 of 26 November 2014, such as investment fund participations, life insurance products that have an investment element to which said Regulation applies, and structured products and deposits, which have specific regulation from 31 December 2016, intended for customers and potential customers to understand and compare the fundamental characteristics and risks of said products, including for this purpose a risk indicator with a homogeneous format and content. The fact that this regulation is still pending development at the community level and that, as stated in the aforementioned Regulation (EU) No 1286/2014 of 26 November 2014, the information supplied to retail investors regarding this type of product must be coordinated at the European level, justifies this exclusion. Likewise, public debt is excluded from the objective scope of application, given the guarantee of public administrations with which it is endowed, which makes its classification that of an asset with high liquidity and solvency for the purposes of prudential regulation and, in particular, Regulation 575/2013/EU of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, and amending Regulation 648/2012/EU. Likewise, this order excludes collective insurance policies that instrument pension commitments, corporate social security plans, insurance contracts contracted by pension plans for the coverage of risks and benefits of the plan, as they are not directed to commercialization in the retail
market, as well as the life insurance modalities provided for in Article 3 of Order ECC/2329/2014, of 12 December, which regulates the calculation of the expected profitability of life insurance operations that share essentially a biometric component.
Chapter I also regulates the subjective scope of application of the order, which includes both Spanish financial entities capable of commercializing this type of product, as well as foreign entities that do so in Spanish territory through a branch, agent, or under the regime of free provision of services. Finally, the scope of application of the order is completed by two closing norms: first, the order applies only in relation to the commercialization of products to non-professional clients; and second, compliance is exempted for the service of discretionary and individualized portfolio management, given that in these cases it is the company that makes investment decisions on behalf of the client.
In Chapter II, the so-called "risk indicator" is regulated, which entities must provide to the customer or potential customer when they provide investment services or commercialize a financial product. This indicator will be prepared and graphically represented in accordance with the provisions of the annex and will classify the financial product in question into one of the 6 categories provided for in the order. Additionally, in this chapter, alerts regarding liquidity and the complexity of the product are also established, which must only be included in the information delivered to the customer or potential customer if any of the circumstances expressly provided for in the articles of the ministerial order occur. Regarding the distance commercialization of financial products, it is expressly specified, for the sake of regulatory clarity, that the risk indicator and the alerts regarding liquidity and complexity must be provided to the potential customer before contracting said products, in accordance with what is established in Article 7 of Law 22/2007, of 11 July, on the distance commercialization of financial services intended for consumers. In the last chapter, titled "Regulatory, Disciplinary and Supervision Norms," the regime applicable to each of the respective material scopes of the financial services upon which it projects is collected. Finally, the annex includes the graphical representation of the risk indicator and the warnings regarding the liquidity and complexity of each product, as well as certain technical norms. cve: BOE-A-2015-11932 Verifiable at http://www.boe.es

OFFICIAL STATE GAZETTE
No. 265 Thursday, 5 November 2015 Sec. I. Page 104570 VI This order is issued in exercise of the powers expressly conferred upon the Minister of Economy and Competitiveness by Article 5 of Law 10/2014, of 26 June, on the regulation, supervision, and solvency of credit institutions; Articles 209 and 210 of the consolidated text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of 23 October; Article 64 and the second final provision of Royal Decree 217/2008, of 15 February, on the legal regime of investment service companies and other entities providing investment services, and partially amending the Regulation of Law 35/2003, of 4 November, on Collective Investment Institutions, approved by Royal Decree 1309/2005, of 4 November; Article 96.3 of Law 20/2015, of 14 July, on the regulation, supervision, and solvency of insurance and reinsurance entities; Article 105 of the Regulation on the Regulation and Supervision of Private Insurance, approved by Royal Decree 2486/1998, of 20 November; and the second final provision of said Royal Decree 2486/1998; the third final provision of the consolidated text of the Law on the Regulation of Pension and Investment Funds, approved by Royal Legislative Decree 1/2002, of 29 November; and Articles 48.1 and 101.5 of the Regulation on pension and investment funds, approved by Royal Decree 304/2004, of 20 February. By virtue thereof, with the prior report of the Ministry of Finance and Public Administrations prepared in accordance with Article 24.3 of Law 50/1997, of 27 November, of the Government; and in accordance with the Council of State, I HEREBY ORDER:
CHAPTER I
General Provisions
Article 1. Object.

1. This ministerial order aims to guarantee an adequate level of protection for the customer or potential customer of financial products by establishing a standardized information and classification system that warns them of their risk level and allows them to choose those that best suit their savings and investment needs and preferences.
2. For this purpose, entities will deliver to their customers or potential customers a risk indicator and, where appropriate, alerts regarding liquidity and complexity.
   Article 2. Objective Scope.
3. This order applies to the following financial products, without prejudice to what is established in paragraph 2 of this article:
   a) Financial instruments collected in Article 2.1 of the consolidated text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of 23 October. b) Bank deposits, including, among others, demand deposits, savings deposits, and time deposits. c) Life insurance products with a savings purpose, including insured pension plans. d) Individual and associated pension plans.
4. Notwithstanding the foregoing in the previous paragraph, the following financial products are excluded from the scope of application of this order:
   a) Collective insurance policies that instrument pension commitments, corporate social security plans, insurance contracts contracted by pension plans for the coverage of risks and benefits of the plan, and the life insurance modalities provided for in Article 3 of Order ECC/2329/2014, of 12 December, which regulates the calculation of the expected profitability of life insurance operations. b) Public debt issued by the State, the Autonomous Communities, and Local Entities, as well as debt that implies exposure to the public sector, provided it meets the requirements established in Article 56.2 of Royal Decree 84/2015, of 13 February, which develops Law 10/2014, of 26 June, on the regulation, supervision, and solvency of credit institutions. Also excluded from the scope of application of this order is debt issued by institutions, bodies, or agencies of the European Union and central governments, regional or local authorities, or other public authorities, public law bodies, or public companies of the Member States of the European Union, analogous to those indicated in this letter. c) Financial products subject to Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products. cve: BOE-A-2015-11932 Verifiable at http://www.boe.es

OFFICIAL STATE GAZETTE
No. 265 Thursday, 5 November 2015 Sec. I. Page 104571 d) Participations and shares of collective investment institutions subject to Commission Regulation 583/2010/EU of 1 July 2010 establishing provisions for the implementation of Directive 2009/65/EC of the European Parliament and of the Council as regards the key investor information and the conditions under which that information or the prospectus must be provided on a durable medium other than paper or through a website; or to Circular 2/2013, of 9 May, of the National Securities Market Commission, on the document with key investor information and the prospectus of collective investment institutions.
Article 3. Subjective Scope of Application.

1. This ministerial order shall apply to the following entities when they provide investment services or commercialize, in Spanish territory, any of the financial products provided for in Article 2 to customers or potential customers referred to in paragraph 4:
   a) Investment service companies provided for in Article 143 of the consolidated text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of 23 October, including natural persons who have the status of financial advisory companies, as well as entities authorized to provide certain investment services and auxiliary services, by virtue of Article 145 of said law. b) Credit institutions subject to Law 10/2014, of 26 June, on the regulation, supervision, and solvency of credit institutions. c) Credit finance establishments, subject to Title II of Law 5/2015, of 27 April, on the promotion of business financing. d) Insurance entities subject to Law 20/2015, of 14 July, on the regulation, supervision, and solvency of insurance and reinsurance entities. e) Pension fund management entities subject to the consolidated text of the Law on the Regulation of Pension and Investment Funds, approved by Royal Legislative Decree 1/2002, of 29 November.
2. This ministerial order shall also apply to the following entities when they provide investment services or commercialize, in Spanish territory, any of the financial products provided for in Article 2 to customers or potential customers:
   a) Branches in Spain of the entities provided for in the previous paragraph, which are authorized in a Member State of the European Union or in a third country. b) The entities provided for in the previous paragraph which are authorized in a Member State of the European Union, when operating in Spain through an agent established in national territory. c) The entities provided for in letters a), b), and d) of the previous paragraph which are authorized in a Member State of the European Union, when operating in Spain under the regime of free provision of services. d) The entities provided for in the previous paragraph which are authorized in a non-member State of the European Union, when operating in Spain without a branch. cve: BOE-A-2015-11932 Verifiable at http://www.boe.es