Shearman & Sterling LLP | Financial Regulatory Developments Focus | EU Authorities Highlight Importance of Bail-In Risk Disclosures for Retail Investors in Bank Debt Liabilities
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  • EU Authorities Highlight Importance of Bail-In Risk Disclosures for Retail Investors in Bank Debt Liabilities
    The European Banking Authority and the European Securities and Markets Authority have published a joint statement on the treatment of retail holdings of debt financial instruments under the EU Bank Recovery and Resolution Directive and the revised Markets in Financial Instruments Directive. The EBA and ESMA highlight that care is needed when bail-in is implemented in relation to debt liabilities held by retail customers. There have been a number of mis-selling cases as a result of firms not complying with the investor protection requirements at the point of sale of banks' debt liabilities to retail investors.

    The EBA and ESMA emphasize that to ensure that debt instruments are distributed to clients for whom they are suitable, firms must properly implement the MiFID II investor protection requirements. Those requirements oblige firms to, among other things, act honestly, fairly, professionally and in the best interests of clients, disclose certain information to potential and existing clients and conduct suitability assessments. In addition, the product governance framework requires manufacturers and distributors of financial products to act in the client's best interests at all stages of the life-cycle of products or services. In particular, firms must identify the target market for complex products to a greater level of detail than other products. Instruments subject to bail-in must be classified as complex products.

    ESMA and the EBA remind firms to comply with MiFID II obligations, including the requirement to disclose to retail investors information on the potential treatment of banks' debt liabilities in resolution or insolvency. ESMA is appealing to firms to send existing customers a specific written communication about the risks involved in investing in debt liabilities issued by banks, even though the obligation may be fulfilled through periodic reporting or other similar means.

    The statement is also addressed to resolution authorities who are responsible for winding down a failing bank. The statement confirms that where a bank's liabilities are held by a large number of retail investors, this is not in itself an impediment to resolvability and it does not per se justify an exemption from bail-in. During resolution planning, resolution authorities should consider whether the liabilities held by retail investors should be exempted from bail-in and what the impact of such an exemption would be on the loss absorbing capacity of the bank's liabilities.

    View the joint statement.

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