ANNUAL CONFERENCE FOR IN-HOUSE LAWYERS

1. ANNUAL CONFERENCE FOR IN-HOUSE LAWYERS Information and advise duties: How to tackle “misselling”? By Antoine MAFFEI and Ferheen MAHOMED

2. INFORMATION AND ADVISE DUTIES: HOW TO TACKLE MISSELLING ? Summary • Information and advise requirements under the Markets in Financial Instruments Directive (MiFID) and an Asian perspective • 3 categories of investors under the MiFID • The scope of the information and advise duties of investment services providers under the MiFID depends on the category to which the investors belong to • An Asian perspective • Structured loans entered into between local authorities and credit institutions • The Charter of conduct of business between local authorities (collectivités locales) and credit institutions (the GISSLER Charter) • Are structured loans entered into between local authorities and credit institutions financial instruments in the sense of the MiFID? • The Packaged Retail Investment Products (PRIPs) • Main features of PRIPs • Are PRIPs financial instruments in the sense of the MiFID? • A French approach under consideration: the Deletré Report 2 • Scope of the Deletré Report 2: all financial, banking and insurance products • Main recommendations under the Deletré Report 2 • Conclusion

3. INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND AN ASIAN PERSPECTIVE The classification of investors under the MiFID • Introduction of 3 categories of investors: • Non professional clients (clients non professionnels or clients de détail) • Professional clients (clients professionnels) • Eligible counterparties (contreparties éligibles) (Annex II of the MiFID / Articles D. 533-11 to D. 533-14 of the CMF) • Purpose: drawing up of different levels of requirements in terms of information and advise (applicable to investment services providers) which will depend on the category to which the investors belong to

4. INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND AN ASIAN PERSPECTIVE Scope of the information and advise requirements applicable to investment services providers under the MiFID • Any Information addressed by investment services providers to investors must be: • fair • clear • not misleading (Article 19.2 of the MiFID / Article L. 533-12 CMF) • Information requirements applicable prior to and after the provision of investment services (Article 19 of the MiFID)

5. INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND AN ASIAN PERSPECTIVE Scope of the information and advise requirements applicable to investment services providers under the MiFID • Non professional clients • Definition: clients which are not professional (Article 4 of the MiFID) • Reinforced information and advise requirements applicable to the investment services providers • Professional clients • List of professional clients: in Annex II of the MiFID implemented under French law by Article D. 533-11 of the CMF • Attenuated information and advise requirements applicable to investment services providers • Eligible counterparties • List of eligible counterparties: in Article D. 533-13 of the CMF • Information and advise requirements do not apply to investment services providers in respect of eligible counterparties

6. INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND AN ASIAN PERSPECTIVE An Asian perspective • Background to enhanced regulatory regime to prevent misselling in Asia • Lehman minibond to retail investors in Hong Kong and Singapore Minibond complaints

7. INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND AN ASIAN PERSPECTIVE An Asian perspective • What was sold and how it was sold • Purely on credit rating – misselling at its worst • Legislation enquiries • Interrogation by politcians in open forum of regulators and distributing banks • Compensation by distributing banks • 100% to senior citizens and illiterate investors, 60% to the remaining investors

8. INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND AN ASIAN PERSPECTIVE An Asian perspective • Resulting in enhanced regulatory regime in the region • Hong Kong - Undertakings • We, __________________, the Arranger appointed by the Issuer in relation to the issue of the Product : • confirm that we have conducted reasonable due diligence on the issuer, the guarantor and any other counterparty (where applicable), and the Product and the Offer Documents to ensure that : • the issuer will be able to comply with all laws, codes and guidelines applicable thereto; • the product is appropriate for distribution to the public taking into account the nature of the Product and the nature of the persons likely to consider acquiring them. • Product providers are to be required to confirm that a structured product is designed fairly and is appropriate for the market(s) for which it is intended.

9. INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND AN ASIAN PERSPECTIVE An Asian perspective The importance of assessing suitability The key obligation that relates to the risk of misselling is the need for banks and firms to ensure that products are suitable for their clients. This means banks and firms must know their client’s financial situation, investment experience and investment objectives (General Principle 4) and, having regard to that information, “..when making a recommendation or solicitation, ensure the suitability of the recommendation or solicitation for that client is reasonable in all the circumstances” (Para 5.2). This is the cornerstone obligation for banks and firms engaged in the sale of financial products. Let me be clear about the requirement of suitability. It does not mean banks and firms must make sure the client has received a copy of the prospectus, or that the client has been given a list of risks attached to the product or signed a form that says they have read the prospectus. These things might be relevant but they do not by themselves satisfy the requirement of suitability. The onus is on the bank or the firm to ensure the product is an appropriate one for the client given the client’s financial situation, investment experience and investment objectives. The Code casts the obligation on the bank or firm to know the product is suitable. The obligation is not on the client. It goes without saying that the person making the suitability assessment must have appropriate expertise to perform that task; have adequate training and information about the product, understand the product properly and be properly supervised. After all, the client is relying on that expertise and experience when making his investment decision. SFC, 23 October 2008

10. INFORMATION AND ADVISE REQUIREMENTS UNDER THE MiFID AND AN ASIAN PERSPECTIVE An Asian perspective Taiwan • The issuer should ensure that a product cannot be offered to non-professional investors in Taiwan unless the same product can be offered to non-professional investors in the jurisdiction where the offshore Issuer or the product is registered. Further, the terms of the offer in Taiwan must not be less favourable than those in the “home country”. • Why? Minibonds not offered in the US / Europe China • Banks are responsible to ensure that the products are suitable for a particular category of clients.

11. STRUCTURED LOANS ENTERED INTO BETWEEN LOCAL AUTHORITIES AND CREDIT INSTITUTIONS The GISSLER Charter: Introduction • The GISSLER Charter is a charter of conduct of business between local authorities (collectivités locales) and credit institutions • The GISSLER Charter has been signed on December 7th, 2009 • The GISSLER Charter is aimed at ensuring marketing of structured loans to local authorities compliant with their needs • Strong commitments of credit institutions under the GISSLER Charter • Local authorities are committed to a high level of transparency under the GISSLER Charter

12. STRUCTURED LOANS ENTERED INTO BETWEEN LOCAL AUTHORITIES AND CREDIT INSTITUTIONS Main commitments of credit institutions under the GISSLER Charter: • Credit institutions refrain from marketing to local authorities: • Financial products exposing to a risk on principal or products based on high risk indexes • Financial product with cumulative index effects (“Snowbolling Effects”) • Credit institutions undertake under their marketing approach to present products according to an agreed classification of indexes • Local authorities are recognized as non professional investors • Reinforced information duties in favor of local authorities as regards the risks attached to structured products • Reinforced advise duties in favor of local authorities

13. STRUCTURED LOANS ENTERED INTO BETWEEN LOCAL AUTHORITIES AND CREDIT INSTITUTIONS Main commitments of local authorities under the GISSLER Charter: • Reinforced transparency in respect of decisions regarding borrowing and debt policies of local authorities • Main features of borrowing and debt policies provided to the deliberative body of local authorities by the executive committee of such authorities • Such provision shall enable the deliberative body to define borrowing and debt policies the executive committee will implement • Reinforced financial information in respect of structured products subscribed by local authorities • Detailed presentation of the structure and outstandings of the structured products and the type of underlying indexes by the executive committee of local authorities • Such presentation shall be provided to the deliberative body of such authorities

14. STRUCTURED LOANS ENTERED INTO BETWEEN LOCAL AUTHORITIES AND CREDIT INSTITUTIONS Do MiFID requirements apply to structured products entered into between local authorities and credit institutions? • MiFID requirements apply to financial contracts (contrats financiers such as swaps, etc…) entered into (in parallel of loans) between local authorities and credit institutions (as the case may be, local authorities will be considered as non professional clients, save in the event that they have chosen to be deemed as professional clients) • MiFID requirements do not apply to structured loans entered into between local authorities and credit institutions (In its Feedback Statement dated 3 November 2009 on MiFID complex and non complex financial instruments, CESR provides that MiFID requirements do not apply to loans as they are not MiFID financial instruments)

15. THE PACKAGED RETAIL INVESTMENT PRODUCTS (PRIPs) Features of PRIPs: • They provide retail investors with easy access to financial markets • They offer exposure to underlying financial assets, but in packaged forms which modify that exposure compared with direct holdings • Their primary function is capital accumulation, although some may provide capital protection • They are generally designed with the mid- to long-term retail market in mind • They are marketed directly to retail investors, although they may also be sold to sophisticated investors

16. THE PACKAGED RETAIL INVESTMENT PRODUCTS (PRIPs) Examples of PRIPs • Investments packaged as life insurance policies • In unit-linked life insurance policies (assurance-vie en unité de compte), a portion of the premium is used to purchase life cover (the sum insured) with the balance invested in a fund such as a UCITS • The return on the policy is linked to the performance of the funds • As opposed to traditional life insurance products, unit-linked policies usually do not guarantee the payment of a determined financial amount in particular in the case of death / survival, but instead an amount which is a multiple of the market value of one or several units. Therefore, by definition, the policy holder bears the investment risk

17. THE PACKAGED RETAIL INVESTMENT PRODUCTS (PRIPs) Examples of PRIPs • Structured term deposits • Structured term deposits (dépôts à terme structurés) offer a combination of a term deposit with an embedded option or an interest rate structure • They are designed to achieve a specific payoff profile (profil de rendement), which they achieve through transactions in derivatives such as interest rate and currency options • Other examples: • Investment (or mutual) funds • Retail structured securities

18. THE PACKAGED RETAIL INVESTMENT PRODUCTS (PRIPs) PRIPs: MiFID financial instruments ? • In its feedback statement dated 3 November 2009 on MiFID complex and non complex financial instruments, CESR provides that the MiFID requirements do not apply to deposits or life insurance products as they are not MiFID financial instruments • The Commission of the European Communities considers that the appropriate approach is to apply the same legislative requirements across all sales of PRIPs, irrespective of the distribution channel employed • According to the Commission of the European Communities: • The MiFID provisions on conduct of business (including information and advise duties of investment services providers in favor of investors) and conflicts of interests offer a benchmark for such requirements • The extension of these measures to all PRIPs could be achieved by creating a new directive aimed at extending the scope of the relevant MiFID provisions so that they apply to all entities selling the relevant products (Update on Commission work on PRIPs dated 16 December 2009 and Communication from the Commission to the European Parliament and the Council on PRIPs dated 30 April 2009)

19. THE PACKAGED RETAIL INVESTMENT PRODUCTS (PRIPs) PRIPs: MiFID financial instruments ? • Legal issues arising in France as regards life insurance products • Ordinance n° 2009-106 dated 30 January 2009 on life insurance products marketing and on mutual contingency and insurance transactions: • Information duties applicable to life insurance providers • Advise duties applicable to life insurance providers • European insurance community has expressed material concerns in respect of the application of MiFID to life insurance products marketing • MiDIF requirements are not adapted to life insurance products (peculiarly, the classification of clients)

20. A FRENCH APPROACH UNDER CONSIDERATION: THE DELETRÉ REPORT 2 Deletré Report 2: Introduction • The Deletré Report 2 dated July 2009 on the supervision of professional obligations towards customers in the financial industry deals with the whole of financial, banking and insurance products and services • Some recommendations of the Deletré Report 2 had been submitted to public consultation until 31 december 2009 • Main purpose of the Deletré Report 2: implementation of a procedure aiming at improving customers’ protection and creating standardized rules in order to stop marketing practices non compliant with customers’ needs

21. A FRENCH APPROACH UNDER CONSIDERATION: THE DELETRÉ REPORT 2 Main recommendations under the Deletré Report 2 submitted to public consultation • Introduction under French law of the loyalty principle (principe de loyauté) in the financial industry • Investment and banking services providers shall implement specific procedures so that they act loyally vis-à-vis customers • Supervision of such obligation by the French supervision authorities • Setting up of recommendations in order to implement the loyalty principle (such recommendations to be approved by the French supervisor, after consultation with customers and professionals) • Reinforced supervision of investment and banking services providers by professional associations which represent those providers (provided that such associations are authorized and supervised by the French supervision authorities in the financial industry)

22. A FRENCH APPROACH UNDER CONSIDERATION: THE DELETRÉ REPORT 2 Main recommendations under the Deletré Report 2 submitted to public consultation • Burden of proof placed on the investment and banking services providers • Investment and banking services providers need to prove that they have acted loyally vis-à-vis customers • This implies relevant traceability system as regards due diligences conducted by such providers • The French Banking community has expressed material concerns in this respect

23. CONCLUSION Overview of the main requirements which may apply to products providers in the future: The approach in Asia • The approach in Asia represents a significant departure from the existing regime and imposes onerous additional obligations on the product providers. Similar to the proposals developed by the Committee of European Securities Regulators (CESR) and the “TCF” approach of the UK Financial Services Authority (FSA), it appears that product providers will, in the future, be required to: • ensure that products - covering all elements of design - are appropriate for the target market, given the risk tolerance and preference of that target market, and communicate this to distributors • provide enough information to the distributors to enable the distributors adequately to assess suitability for their customers

24. CONCLUSION Overview of the main requirements which may apply to products providers in the future: The approach in Asia • consider the distribution of the total gross investment returns of the product, split between the different stakeholders in the product and whether this distribution is fair, particularly from the investors’ perspective • ensure all relevant risks – market, liquidity, counterparty – are accurately identified and stress tested during the product design process • state clearly key product risks and assess these against prevailing market conditions • assess continually any risks posed to the product before and after the sale, and alert investors if contingency action needs to be taken • act with due care and diligence when passing on promotions which the product providers have created to the distributors • ensure that systems and controls offer an effective framework for risk management in a range of market conditions

25. CONCLUSION Some practical points from an Asian perspective Issues to look for • Product v client suitability • Documentation of client profile • Refreshment of profile: requirements of the Code • Record of suitability assessment / recommendations made • Client sign-offs of profile • Audit trail of communications / correspondence with client • Language of account documentation • Ongoing self-assessments