The Belgian Financial Services and Markets Authority (FSMA) published a communication regarding the application of the unfair terms legislation in the context of the offering of securities to consumers (the Communication)1.
- Issuers and distributors will have to carefully review the issuance, marketing and distribution of financial products to Belgian consumers. The Communication is relevant to structured notes as well as non-structured notes, retail issues as well as private placements and passported as well as non-passported issues.
- Issuers and arrangers will have to review the structure and content of offering documents, e.g. the terms and conditions in the base prospectus, in order to be able to comply with the Communication.
- The terms and conditions of specific products will have to be reviewed in light of the Communication, especially modification clauses, call options and substitution clauses. Certain typical clauses such as a tax call at par, a clean-up call following change of control, and a discretionary issuer's call, are affected by the Communication.
2. General considerations
The legal provisions in the Code of Economic Law prohibiting unfair terms apply to "investment instruments"2. An unfair term is null and void, and inclusion of an unfair term could render the entire contract null and void. The Code of Economic Law does not contain clear guidance regarding the application of these provisions to the terms and conditions of investment instruments, e.g. structured notes. Hence the importance of the Communication.
The Communication is part of a broader trend targeting products that are sold to retail investors. Last year, for example, the FSMA introduced a strict legal framework for the distribution of OTC Derivatives (such as binary options and CFDs), restricting the distribution of such products to retail consumers. Previously, the FSMA had already introduced a voluntary moratorium on the distribution of certain complex structured products, and strict marketing guidelines regarding the marketing of financial products across various product types (including deposits, securities, funds and insurance products).
2.2 Scope of application
(a) Structured notes and other financial instruments
The scope of application of the Communication is broad, as the following instruments are captured:
- Structured notes: the FSMA has drafted the Communication mainly based on its review of the offers of structured notes, i.e. notes offering a return linked to various underlying values (note that the Communication does not include a definition of the concept of structured notes).
- Other non-structured debt instruments: the Communication is also applicable to non-structured debt instruments, instruments with a repayment of a nominal value at maturity date, e.g. plain vanilla bonds or senior notes.
- Investment instruments without a fixed duration: financial derivatives such as CFD or warrants, for example. While these are not directly targeted by the Communication, according to the FSMA some recommendations and interpretations can be applied mutatis mutandis to these products.
(b) Public offer or private placement
The Communication applies to public offers as well as private placements. The Communication is relevant if "consumers" within the meaning of the Code of Economic Law can subscribe to the investment instruments. Consumers are natural persons acting outside their trade, business or profession. There are no exemptions, e.g. for (i) high net worth individuals or (ii) based on a minimum investment amount.
(c) Passported offers, governing law
The Communication applies as soon as investment instruments are offered to consumers on the Belgian territory and is also applicable to passported issues. The FSMA does not distinguish between Belgian and foreign law governed terms and conditions. In this respect, further clarification will be required.
2.3 Legal status of the Communication
The Communication consists of "recommendations and interpretations" by the FSMA and cannot be considered as a binding regulation. However, the FSMA has supervisory powers to review offers of investment instruments, including their compliance with the Code of Economic Law3. While there is in principle no "a priori" review of the terms and conditions by the FSMA, the FSMA will take the recommendations into account as part of its a priori review of marketing materials and/or prospectuses for a public offer. In the context of legal disputes with individual investors, courts are not legally bound by the determinations made by the FSMA.
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1 http://www.fsma.be/~/media/Files/fsmafiles/circ/en/2017/fsma_2017_04.ashx (English version of the Communication)
2 Article I.8, 18° Code of Economic Law
3 Article VI.11 § 2 Code of Economic Law. Note that the administrative supervisory power of the FSMA is a concurrent power with the Belgian Federal Agency Economic Affairs. This federal agency is not formally bound by the FSMA Communication.
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