ESMA Opinion on the product intervention measures relating to turbos proposed by the Dutch Authority for the Financial Markets (AFM)
The Dutch Authority for the Financial Markets (AFM) notified ESMA on 25 January 2021 of its intention to take product intervention measures under Article 42 of that Regulation (national measures). The AFM provided further information on the content of its notification on 3 May 2021.
The national measures consist of a permanent restriction of the marketing, distribution or sale of turbos to retail clients in the Netherlands. In particular, the measures will be as follows: (i) a leverage cap, (ii) a prohibition to provide retail clients with a payment or other prohibited benefits in relation to the marketing, distribution or sale of a turbo, and (iii) the requirement of a risk warning, all by and large in line with existing restrictions already applicable to contracts for differences (CFDs) in the Netherlands and throughout the Union.
Turbos addressed by the national measures are bonds that have a stop-loss feature and whose value is derived from the value of an underlying asset and the financing of the value of the underlying asset, or other debt instruments that have a stop-loss feature and whose value is derived from the value of an underlying asset and the financing of the value of the underlying asset. They are high-risk leveraged products with which investors speculate that the prices of the underlying asset, such as a share, an index or a currency, will rise or fall.
Although turbos are complex products, they are offered to retail clients most commonly on electronic trading platforms, without the provision of investment advice or portfolio
management. An assessment of appropriateness is required in such cases pursuant to Article 4:24 of the Dutch Financial Supervision Act (Wet op het financieel toezicht / Wft). Providers are obliged to warn clients if they judge the service or product to be inappropriate. However, this assessment alone does not prevent turbos, without applying restrictions, from ending up with clients for whom they are not appropriate.
Based on the AFM finding that in the Netherlands turbos are very similar to and similarly used by retail clients as CFDs, the AFM is of the view they should also be subject to similar restrictions as CFDs.
For the above reasons, the AFM reached the conclusion that turbos pose significant investor protection concerns in the Netherlands and that, without the national measures, turbos would continue to cause retail clients harm, inter alia, from potentially sudden and unexpected losses.
ESMA's assessment of the national measures' justification and proportionality
In its assessment of the justification and proportionality of the national measures, ESMA has taken into account (i) the reasons provided by the AFM in its notification of the national measures and in subsequent exchanges, as resulting from the ESMA opinion; (ii) the AFM's consultation paper, including the accompanying cost-benefit-analysis and the analysis of data provided on significant losses incurred by Dutch retail clients; (iii) the complexity of turbos; (iv) the lack of transparency in their pricing; and (v) the AFM's assessment of the turbo market in the Netherlands and its evolution.
In ESMA's measures, ESMA acknowledged that turbos, despite differing in various respects from CFDs, also have similarities with CFDs and that ESMA and the NCAs would monitor whether detrimental consequences for retail clients similar to those observed in relation to CFDs would also arise in respect of products with similar or comparable features to CFDs. For the purposes of the national measures, ESMA has assessed the relevance of the AFM's supervisory experience, in particular the evidence concerning the significant losses of Dutch retail clients when investing in turbos and the recent expansion of the turbo retail market in the Netherlands.
Given these national specificities, ESMA considers that the national measures are justified and proportionate.
The national measures explained above are intended to apply both to turbp providers authorised in the Netherlands and to turbo providers authorised in another Member State that provide investment services and/or perform investment activities in the Netherlands by way of a branch or the freedom to provide services.