Kredittilsynet (The Financial Supervisory Authority of Norway) has adopted changes to the Regulations of 25 September 2006 No. 1317 on the duty of disclosure in relation to structured products offered for purchase. The changes will go into effect on 1 March 2008. In connection with this, Kredittilsynet is sending a circular to banks and finance companies with information on how the rules should be put into practice.
The circular shows that the changes to the regulations on the duty of disclosure in relation to structured products offered for purchase will cause a number of the provisions concerning investor protection in the securities regulations to apply to financial institutions when they undertake sales and advising related to deposit-based structured products (including index-linked bank deposits). With these changes, the regulations for the sale of index-linked bank deposits will be identical to the regulations for the sale of equity-indexed bonds.
The regulations will make the sale of structured products more difficult by posing a number of new requirements on the financial institutions. Kredittilsynet presupposes that the institutions should not sell structured products or other complex products to customers who cannot be regarded as professional investors.
In addition, Kredittilsynet advises the financial institutions against offering loan financing when selling structured products. This is based on historically low returns on equity capital and the risk of significant losses for the customers on this form of financing.
Kredittilsynet has also found grounds to bring to mind the regulations that apply for loan agents, and concerning the ability of securities companies to receive remuneration from entities other than the company’s customers.
Director General Bjørn Skogstad Aamo of Kredittilsynet says:
“The new regulations means in practice a complete stop to the purchase of structured products financed by loans. The regulations will also mean that banks and other financial institutions will normally not be selling such products to normal savers, who cannot be regarded as professionals in this context.”
Facts about structured products and derivatives:
”Structured products” means in this context investment products that consist of a savings or bond portion and a derivative component. The deposit or bond forms the basis for a guaranteed return for the investor, whereas the derivative component is to generate returns beyond the guaranteed amount.
The derivative component is preferably an option linked to indexes related to stock markets, currency markets, raw materials markets, interest markets, etc, and which in this manner connects the total return on the investment to the same indexes and markets.
Attachment: Circular 4/2008 from Kredittilsynet (Norwegian version):
"Structured products – changes in regulations on the duty of disclosure in relation to structured products offered for purchase"
Contact persons:
Director General Bjørn Skogstad Aamo, tel. (+47) 22 93 99 29
Senior Supervisory Adviser Erik Lind Iversen, tel. (+47) 22 93 99 21 / mobile tel. (+47) 918 27 611
Head of Section Eystein Kleven, tel. (+47) 22 93 98 13 / mobile tel. (+47) 906 87 501
Senior Communications Adviser Arild Eide Johansen, tel. (+47) 22 93 99 94,
mobile tel. (+47) 971 52 011
Communications Adviser Merete Ulvund, tel. (+47) 22 93 99 99, mobile tel. (+47) 905 99 342
