CHAPTER V

SUPERVISORY MEASURES ON PRODUCT INTERVENTION AND POSITION MANAGEMENT
SECTION 1

Product intervention

Criteria and factors to be taken into account by competent authorities for the purposes of product intervention powers(Article 42(2) of Regulation (EU) No 600/2014)
Article 21
1
For the purposes of Article 42(2)(a) of Regulation (EU) No 600/2014, competent authorities shall assess the relevance of all factors and criteria listed in paragraph 2, and take into consideration all relevant factors and criteria in determining when the marketing, distribution or sale of certain financial instruments or structured deposits or financial instruments or structured deposits with certain specified features or a type of financial activity or practice creates a significant investor protection concern or a threat to the orderly functioning and integrity of financial markets or commodity markets or to the stability of the whole or part of the financial system within at least one Member State.
For the purposes of the first subparagraph, competent authorities may determine the existence of a significant investor protection concern or a threat to the orderly functioning and integrity of financial markets or commodity markets or to the stability of the whole or part of the financial system within at least one Member State based on one or more of those factors and criteria.
2
The factors and criteria to be assessed by competent authorities to determine whether there is a significant investor protection concern or a threat to the orderly functioning and integrity of financial markets or commodity markets or to the stability of the whole or part of the financial system within at least one Member State shall include the following:
a
the degree of complexity of the financial instrument or type of financial activity or practice in relation to the type of clients, as assessed in accordance with point (c), involved in the financial activity or financial practice, or to whom the financial instrument or structured deposit is marketed or sold, taking into account, in particular:
- the type of the underlying or reference assets and the degree of transparency of the underlying or reference assets;
- the degree of transparency of costs and charges associated with the financial instrument, structured deposit, financial activity or financial practice, and, in particular, the lack of transparency resulting from multiple layers of costs and charges;
- the complexity of the performance calculation, taking into account whether the return is dependent on the performance of one or more underlying or reference assets which are in turn affected by other factors or whether the return depends not only on the values of the underlying or reference assets at the initial and maturity dates, but also on the values during the lifetime of the product;
- the nature and scale of any risks;
- whether the product or service is bundled with other products or services;
- the complexity of any terms and conditions;
b
the size of potential detrimental consequences, considering in particular:
- the notional value of the financial instrument or of an issuance of structured deposits;
- the number of clients, investors or market participants involved;
- the relative share of the product in investors' portfolios;
- the probability, scale and nature of any detriment, including the amount of loss potentially suffered;
- the anticipated duration of the detrimental consequences;
- the volume of the issuance;
- the number of intermediaries involved;
- the growth of the market or sales;
- the average amount invested by each client in the financial instrument or structured deposit; or
- the coverage level defined in Directive 2014/49/EU, in the case of structured deposits;
c
the type of clients involved in a financial activity or financial practice or to whom a financial instrument or structured deposit is marketed or sold, taking into account, in particular:
- whether the client is a retail client, a professional client or an eligible counterparty;
- clients' skills and abilities, including the level of education, experience with similar financial instruments or structured deposits or selling practices;
- clients' economic situation, including their income, and wealth;
- clients' core financial objectives, including pension saving and home ownership financing;
- whether the product or service is being sold to clients outside the intended target market or where the target market has not been adequately identified; or
- the eligibility for coverage by a deposit guarantee scheme, in the case of structured deposits;
d
the degree of transparency of the financial instrument, structured deposit or type of financial activity or practice, taking into account, in particular:
- the type and transparency of the underlying;
- any hidden costs and charges;
- the use of techniques drawing clients' attention but not necessarily reflecting the suitability or overall quality of the product, the financial activity or the financial practice;
- the nature of risks and transparency of risks;
- the use of product names or terminology or other information that is misleading by implying a greater level of security or return than those which are actually possible or likely, or which imply product features that do not exist; or
- in case of structured deposits, whether the identity of deposit takers which might be responsible for the client's deposit, is disclosed;
e
the particular features or components of the structured deposit, financial instrument, financial activity or financial practice, including any embedded leverage, taking into account, in particular:
- the leverage inherent in the product;
- the leverage due to financing;
- the features of securities financing transactions; or
- the fact that the value of any underlying is no longer available or reliable;
f
the existence and degree of disparity between the expected return or profit for investors and the risk of loss in relation to the financial instrument, structured deposit, financial activity or financial practice, taking into account, in particular:
- the structuring costs of such financial instrument, structured deposit, financial activity or financial practice and other costs;
- the disparity in relation to the issuer's risk retained by the issuer; or
- the risk-return profile;
g
the costs and ease with which investors are able to sell the relevant financial instrument or switch to another financial instrument, or exit a structured deposit, taking into account, in particular, where applicable depending on whether the product is a financial instrument or structured deposit:
- the bid-ask spread;
- the frequency of trading availability;
- the issuance size and size of the secondary market;
- the presence or absence of liquidity providers or secondary market makers;
- the features of the trading system; or
- any other barriers to exit or the fact that early withdrawal is not allowed;
h
the pricing and associated costs of the structured deposit, financial instrument, financial activity or financial practice, taking into account, in particular:
- the use of hidden or secondary charges; or
- charges that do not reflect the level of service provided;
i
the degree of innovation of a financial instrument or structured deposit, a financial activity or financial practice, taking into account, in particular:
- the degree of innovation related to the structure of the financial instrument, structured deposit, financial activity or financial practice, including embedding and triggering;
- the degree of innovation relating to the distribution model or length of the intermediation chain;
- the extent of innovation diffusion, including whether the financial instrument, structured deposit, financial activity or financial practice is innovative for particular categories of clients;
- innovation involving leverage;
- the lack of transparency of the underlying; or
- the past experience of the market with similar financial instruments, structured deposits or selling practices;
j
the selling practices associated with the financial instrument or structured deposit, taking into account, in particular:
- the communication and distribution channels used;
- the information, marketing or other promotional material associated with the investment;
- the assumed investment purposes; or
- whether the decision to buy is secondary or tertiary decision following an earlier purchase;
k
the financial and business situation of the issuer of a financial instrument or structured deposit, taking into account, in particular:
- the financial situation of the issuer or any guarantor; or
- the transparency of the business situation of the issuer or guarantor;
l
whether there is insufficient, or unreliable, information about a financial instrument or structured deposit, provided either by the manufacturer or the distributors, to enable market participants at whom it is targeted to make an informed decision, taking into account the nature and type of the financial instrument or the structured deposit;
m
whether the financial instrument, structured deposit, financial activity or financial practice poses a high risk to the performance of transactions entered into by participants or investors in the relevant market;
n
whether the financial activity or financial practice would significantly compromise the integrity of the price formation process in the market concerned such that the price or value of the financial instrument or structured deposit in question is no longer determined according to legitimate market forces of supply and demand, or such that market participants are no longer able to rely on the prices formed in that market or in the volumes of trading as a basis for their investment decisions;
o
whether a financial instrument, structured deposit, financial activity or practice would leave the national economy vulnerable to risks;
p
whether the characteristics of a financial instrument or structured deposit make it particularly susceptible to being used for the purposes of financial crime and, in particular whether the characteristics could potentially encourage the use of the financial instrument or structured deposit for:
- any fraud or dishonesty;
- misconduct in, or misuse of information, in relation to a financial market;
- handling the proceeds of crime;
- the financing of terrorism; or
- facilitating money laundering;
q
whether a financial activity or a financial practice poses a particularly high risk to the resilience or smooth operation of markets and their infrastructure;
r
whether a financial instrument, structured deposit, financial activity or financial practice could lead to a significant and artificial disparity between prices of a derivative and those in the underlying market;
s
whether the financial instrument, structured deposit, financial activity or financial practice poses a high risk of disruption to financial institutions deemed to be important to the financial system of the Member State of the relevant competent authority, in particular considering the hedging strategy pursued by financial institutions in relation to the issuance of the structured deposit, including the mispricing of the capital guarantee at maturity or the reputational risks posed by the structured deposit or practice or activity to the financial institutions;
t
the relevance of the distribution of the financial instrument or structured deposit as a funding source for the issuer or financial institutions;
u
whether a financial instrument, structured deposit, financial activity or financial practice poses particular risks to the market or payment systems infrastructure, including trading, clearing and settlement systems; or
v
whether a financial instrument, structured deposit, financial activity or financial practice would threaten investors' confidence in the financial system.