Trading in turbo securities

On 30 June 2021 the Dutch Authority for the Financial Markets (AFM) introduced restrictions on the marketing, distribution or sale of turbo securities to retail clients in the Netherlands. Such measures followed an assessment opinion from the European Securities and Markets Authority (ESMA) that encouraged national competent authorities to take actions if similar risks for retail investors as those identified by the Dutch authority could arise. On 27 July 2021, the Italian Authority for the Financial Markets disregarded, in part, the ESMA assessment opinion and stated that, at present, there are no conditions for adopting specific product intervention measures in Italy for these products.

The so-called turbo-like products could be considered securities characterised by intrinsic complexity and a high-risk profile. Generally speaking, turbos (also known as turbo warrants/turbo certificates or sprinters or by other names):

• correspond to a leveraged investment in the price changes of an underlying asset;
• are subject to Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market; and
• are typically listed and traded on regulated markets or multilateral trading facilities.

The ability to invest in leveraged products means that taking a position is simpler and cheaper than directly trading the underlying asset. The investor can take larger positions, and profits may be amplified. However, leverage may also accelerate any possible loss.

On 30 June 2021, the AFM limited the marketing, distribution or sale of turbos to retail clients in the Netherlands with effect from 1 October 2021.

The AFM reported significant investor protection concerns observed in the Netherlands and strictly related to the degree of complexity, transparency and the specific features or components of turbos. For example, the AFM reported that these complex products are:

• offered to retail clients most commonly on electronic trading platforms, without the provision of investment advice or portfolio management; and
• promoted in advertisements in a manner that draws attention to the fun aspects of trading in turbos without properly advising regarding the high risks associated with the product.

The restrictions have been adopted pursuant to article 42 of Regulation (EU) No 600/2014 (MiFIR), which provides specific product intervention measures to protect investors. More specifically, the relevant competent authority may prohibit 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. The grounds that need to be satisfied to justify such measures – which should comply with the principle of proportionality – are, inter alia, a financial instrument, structured deposit or activity or practice that gives rise to significant investor protection concerns or poses a threat to the proper functioning and integrity of financial markets.

Before applying a prohibition or restriction pursuant to article 42 of MiFIR, the competent authority has to notify the ESMA with the details of its proposed measure and the related evidence, unless there is an exceptional case where it is necessary to take urgent action.

The AFM’s product intervention measures followed the ESMA’s assessment opinion stating that the Dutch national measures were justified and proportionate; and encouraged national competent authorities to monitor these products at national level to take action if similar risks for retail investors as those identified by the AFM could arise.

The Italian Authority for the Financial Markets’ approach

On 27 July 2021, the Italian Authority for the Financial Markets (Commissione Nazionale per le Società e la Borsa (Consob)) stated in a press release that, at present, there are no conditions in Italy for adopting specific product intervention measures on a national basis for these turbo-like products.

Consob considered the features of transactions in so-called turbo-like products at a domestic level. The requirement for proportionality that article 42 of MiFIR requires Consob’s view, led to the conclusion there was no need to impose restrictions such as those implemented by the AFM.

Therefore at present, in Italy, the marketing, distribution or sale of turbo-like products to retail investors have not been restricted by Consob. In any case, the Italian authority specified in its press release some safeguards that, in its opinion, should be applied to such products. In particular, turbo-like products cannot be subject to execution-only regime; and can be freely traded by retail investors subject at least to the assessment of appropriateness by the relevant intermediary.

Future outlook

Although turbo-like products are not subject to specific product intervention measures in Italy, does not preclude the Italian authorities taking such actions in this market in the near future given the European Commission’s (EC) desire to promote the protection of retail investors.

Indeed, it’s noteworthy that in May 2021 the EC launched a consultation on retail investor protection (which ended on 3 August 2021) to understand how the current framework for retail investments can be improved and ensure that a legal framework for retail investments is adequate for the profile and needs of consumers. In the consultation, the EC – focusing on the access to a fair advice to retail investors in light of current inducement practices – stated that the payment of inducements may lead to conflicts of interest and biased advice, since salespeople may be tempted to recommend products that pay the highest inducements, irrespective of whether or not it is the best product for the investor. In this respect, it should be noted that the Netherlands has banned the payment of inducements.

However, the consequence of banning inducements might be that certain retail investors would be unable or unwilling to obtain advice; and their relevant financial intermediaries might decide not to offer advisory services and redirect them to execution-only services. In this context, Consob’s approach that turbo-like products cannot be subject to execution-only regime could be reviewed by the Italian authority in the near future.