The regulatory regime governing personalized investment products

Updated: Mar 17


Financial authorities classify structured securities, which Futora uses to create personalized investment products, as more complex than traditional asset classes like equities, funds and ETFs. So when offering structured securities to retail investors, it’s important to understand the regulatory framework they fall under.

Before discussing the various regulations, a brief history of Futora shows why our team is ideally positioned to support banks that want to issue structured securities to the retail market.

Futora started life as a startup within Modelity Technologies, a leading provider of regulatory solutions for financial institutions. Some of Modelity’s risk and performance models were adopted throughout Europe by banks involved in manufacturing products such as credit linked notes.

A private equity fund acquired Modelity Technologies in 2019, which resulted in Futora spinning out, taking with it a team of senior executives and seasoned professionals and cutting-edge technology. One of Futora’s founders is Ayal Leibowitz, an active contributor to forums shaping regulations such as PRIIPs, MiFID and ESG directives, as well as the European Structured Investment Products Association.

We believe our deep understanding of the regulatory landscape is a significant competitive advantage. .

 

Three regulations govern structured securities.

Packaged Retail and Insurance-based Investment Products (PRIIPs)

PRIIPs is an EU regulation which came into force at the start of 2018. It aims to improve the transparency around products sold to retail investors by requiring providers to publish Key Information Documents (KIDs). KIDs serve two purposes: they outline the features, potential returns, risk profile and costs of a product, and they allow investors to compare opportunities from different providers.

PRIIPs currently covers a wide range of products such as structured securities, derivatives and insurance-based investments, but it exempts UCITS funds until the end of 2022. After Brexit, the UK transposed PRIIPs into domestic law and extended the exemption for UCITS until the end of 2026.

Markets in Financial Instruments Directive (MiFID)

MiFID is another EU regulation, introduced in 2007 to harmonize rules protecting investors across the region. MiFID’s original scope was quite broad, covering conduct by investment firms, regulatory reporting, trade transparency and more. It was replaced by MiFID II at the start of 2018, which built on the first version to make markets fairer and increase transparency even further.

Identifying a target market for a retail product is one of MiFID’s key requirements. That involves assessing the level of risk to investors, choosing an appropriate distribution strategy and regularly reviewing events that may elevate risk.

Providers have to complete an appropriateness test to check whether a potential investor has the knowledge and experience to understand a product. MiFID classifies structured securities as complex, which narrows their target market.

Sustainability regulations

ESG considerations have become a major theme within the investment industry over the last few years. In March, the EU’s Sustainable Finance Disclosure Regulation (SFDR) came into effect, which imposes various obligations on providers including improving transparency around a product’s sustainability risks. The UK followed suit, introducing its Sustainability Disclosure Requirements (SDR) to coincide with the COP26 conference recently held in Glasgow.

While structured securities aren’t currently subject to either SFDR or SDR, here at Futora we’re participating in ongoing discussions about applying sustainability standards to the asset class.

 

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