Structured Retail Products: Central Bank Publishes Supervisory Guidance

Published date10 March 2023
Subject MatterFinance and Banking, Consumer Protection, Financial Services, Dodd-Frank, Consumer Protection Act
Law FirmArthur Cox
AuthorMs Maedhbh Clancy, Robert Cain and Sarah Thompson

The Central Bank has clarified two aspects of April 2022 Dear CEO letter to investment firms on MiFID structured retail products (SRPs). These relate to how the warnings on use of a decrement index should appear, and the presentation of back-testing.

For our analysis of the April 2022 letter, read our insights here: Structured Retail Products: Central Bank sets out its expectations and next steps for investment firms.

Use of decrement index - appearance of prominent warning

The use of decrement indices (where a fixed dividend is periodically deducted from the underlying index and which can act as a 'downward drag' on performance where it is higher than the actual dividend paid, and in particular where the index falls below its initial level) was identified as an area of particular complexity in April 2022.

Last week's letter clarifies that the prominent warning must appear (in a separate text box) "on the front cover of the marketing material or brochure and on the page on which the decrement index is described in further detail".

The letter provides two sample warnings (one for the front page, and one for the page that describes the index in more detail).

The letter also confirms that where the SRP uses a fixed dividend deduction in the form of a fixed point value (rather than a percentage) firms should bear in mind that this 'drag on performance' will be accelerated if the index falls below its initial level, and that a sustained fall in markets will accelerate the decline in the value of the index.

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