Contributed By TELLES DE ABREU | ADVOGADOS (Lisbon - HQ)
Structured products issued and offered in Portugal tend to comprise structured bonds, warrants, dual products, derivatives, unit-linked, participation units under alternative investment funds and trading in electronic platforms.
Due to the financial crisis of the last few years and the scandals that have occurred in Portugal related to the banks which needed intervention by the Bank of Portugal or which went bankrupt, these days common retail banks tend to have their retail activity more limited to the traditional banking activity (eg, deposits and loans). This is mainly due to intervened banks who had a relevant activity of misplacing or misselling complex financial instruments to non-informed clients who lost their savings (or part of their savings) and which caused the sale of complex financial products to be a relevant regulatory and reputational risk.
These days, investment banks and retail banks with a strong investment banking position in the market are the more active players in the market.
The Portuguese financing market is characterised by a vast set of rules and a complex legal and regulatory regime in relation to structured products. This regime includes the rules regarding information and transparency requirements within the scope of financing activity, the legal requirements in connection to products and operations commonly designated as “unit-linked” and the legal requirements for the information to be provided within the scope of marketing of complex financing products. In any case, such set of rules are focused on establishing information duties for offerors of complex financial products in order to ensure that investors are well informed of the features of such products.
The marketing of structured products is subject to CMVM’s prior approval: the issuer and the entity which intends to market a specific product to an investor, are required to provide the key information regarding each specific product to CMVM, previously to the offering of the products to investors. CMVM will, in turn, analyse the viability related to the trade of such products. It is important to note, however, that the CMVM does not issue any opinion on the products or on the quality of the information provided under the information documents provided in relation with such products.
All advertising and information related to the offer of complex financial instruments is subject to the CMVM prior approval. However, the intervention of the CMVM in the marketing of complex financial products is limited to such advertising approval. Notwithstanding, the CMVM has been establishing protocols with banks offering complex financial products to clients with a view of limiting the offering of those products to retail customers outside of a contract of investment advisory or of management of portfolios.
The issuance and offering of complex financial products is subject to different documentation requirements: regarding the issuance of complex financial products, derivatives shall be governed by the respective agreement and securities shall be based, inter alia, on the corporate resolution for issuance of such securities; the subscription of securities which qualify as complex financial products is also subject to the terms of the subscription document, the prospect (in case of a public offer). Regardless of the nature of the complex financial product, entities offering such products must also prepare the information documents for investors with key information (Key Information Document in case of PRIIPs Regulation or Key Investor Information Document in case of MiFID II).
In Portugal, distribution agreements are a common practice in the market of complex financial products but are not required by law or the regulators. However, if an issuer intends to use the services of a distributor it must ensure that such distributor complies with the same duties to which it is bound to by law.
In order for the distributors of complex financing products to comply “back-to-back” with the same duties of the issuers of the products, they must have procedures to ensure that they comply with the following duties: (i) to assess the investors’ profile; (ii) to make the information documents available to be delivered to potential investors before the effective trade of the products; and (iii) to make sure the suitability tests are effectively and efficiently implemented.
Distributors providing a distribution service on a professional basis are usually compensated for the services rendered. However, although in Portugal the general principle of “freedom of contract” prevails, which means that the parties in an agreement are free to set out the content of said agreement according to their interests and within the limits of the law, there are important restrictions to the calculation of distributor compensation.
In view of the above, there are some limitations to incentives received or to be paid, which means that remunerations, commissions or benefits can only be paid or received whenever there is an additional service or a higher level service rendered to the client and as long as such incentive does not interfere in the investment company’s obligation to act in the best interest of the client.
In Portugal complex financial products tend to be offered privately – ie, directly from the issuer or the distributor to their own contacts or clients, as the case may be. Therefore, in Portugal there is not a very active market for listing and trading of complex financial products. Notwithstanding, many banks have their own trading platforms which are managed by them or by other institutions (eg, white label platforms).
The execution of any public offering of securities in Portugal must be preceded by the disclosure of a prospectus to investors.
The prospectus shall contain complete, true, accurate, clear, objective and lawful information which allows its recipients to consciously decide whether or not to take the offer.
In accordance with the Portuguese Securities Code, the following may be held liable for the damages caused by any information of the prospectus which is not true, accurate, clear, objective and lawful:
Other individuals who accept to be appointed in the prospectus as being liable for its content may also be held liable.
The regime of the Portuguese Securities Code establishes that the liability is objective, as well as the regime of joint liability, and that the compensation shall restitute investors of the loss suffered.
According to Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, the persons responsible for the prospectus, and any supplement thereto, shall be clearly identified in the prospectus by their names and functions or, in the case of legal persons, their names and registered offices, as well as declarations by them that, to the best of their knowledge, the information contained in the prospectus is in accordance with the facts and that the prospectus makes no omission likely to affect its import.
The responsibility for the information given in a registration document or in a universal registration document shall attach to the persons mentioned above only in cases where the registration document or the universal registration document is in use as a constituent part of an approved prospectus.
In the aftermath of MiFID II and subsequent legislation and regulation, Portuguese regulators have been reviewing the Portuguese Securities Code and other related legislation in order to make it compliant and consistent with EU directives and regulations. In this sense, Portuguese regulators are following the EU trend and promoting a greater protection of investors and of the financial markets.
The Law No 35/2018 dated 20 July recently amended the rules for the trade of financing products and of the organisation of financing intermediaries, adopting MiFID II rules and other related regulation.