Insights Blog

Following targeted reviews of investment firms’ offerings of structured retail products (SRPs), the Central Bank has sent a Dear CEO Letter to MiFID investment firms, highlighting six areas where it has identified deficiencies/failures.

The letter also sets out the Central Bank’s supervisory expectations in respect of target market assessments, robust governance where an SRP has complex features, information on past performance, the importance of warnings, the design and presentation of marketing communications, and the disclosure of restructuring risk.

The use of decrement indices (whereby a fixed dividend is periodically deducted from the underlying index and which can act as a ‘downward drag’ on performance where it is higher than the actual dividend paid, and in particular where the index falls below its initial level) is identified as an area of particular complexity.


The Central Bank has asked all firms who manufacture, distribute or otherwise offer SRPs to thoroughly review their SRP arrangements and controls, and to do the following:

  • Discuss ‘Dear CEO’ letter at Board meeting

Table the Dear CEO letter as an agenda item for the next board meeting, and document the Board’s discussions.

  • Conduct full review:

Carry out a full review of their current SRP-related arrangements and controls against the background of the findings and expectations outlined in the Dear CEO letter. That review should extend to SRP design, manufacture and distribution, processes, procedures, training materials, templates and disclosures.  Firms should document the review, including actions taken and planned next steps.

  • Agree and approve an Action Plan by end of Q3:

Complete the review, and discuss and agree the resulting action plan (with clear timelines) at a board meeting, by the end of Q3.

Firms who do not manufacture or distribute SRPs at the moment do not need to take the above steps. However, if a firm subsequently starts manufacturing or distributing SRPs, its arrangements and controls must meet the expectations set out in the Dear CEO letter.


The Central Bank identified failures by some firms to:

  • identify a sufficiently granular target market;
  • adequately consider the use of highly complex features;
  • present fair and balanced past performance information, supported by appropriate context and narrative;
  • display ‘capital at risk’ warnings in prominent positions for products where the client’s capital is at risk;
  • ensure that disclosures are consistently clear and comprehensive (ineffective disclosures were a key focus of the Central Bank’s most recent Consumer Protection Outlook Report); and
  • adequately disclose the risk and potential impact of restructuring to clients prior to sale.


Appendix 1 to the Dear CEO letter details the Central Bank’s expectations across six key areas:

  • Assessments of Target Markets

Firms must carry out assessments of target markets in a proportionate manner.  If an SRP is complex, the assessment must be more comprehensive and granular. The Central Bank also expects distributors of SRPs to refine the target market provided by the manufacturer based on the needs, characteristics and objectives of their client base.

  • Use of Complex Features 

Where products involve complex features, firms must consider if they are appropriate for retail clients and whether the target market is likely to understand them.

Where complex features are approved for use, that approval should involve robust governance and challenge, and the firm must clearly document that.

Where a firm decides that use of a decrement index is appropriate and justified, it must include a specific and prominent warning in all marketing communications to inform investors of the potential negative impact on their return.  The product documents must also fully explain the decrement index, how it works, and how it will affect the client’s potential return in different scenarios.

  • Past Performance 

When providing information on past performance, that information must be fair and balanced, backed-up by clear narrative and context, and must not diminish the potential for capital loss.

Firms must avoid presenting possible investor outcomes that are too optimistic or that give an unbalanced picture.

The Central Bank noted that certain firms have used past performance representations that go back more than 5 years to capture different market conditions where client outcomes were both positive and negative, and has encouraged other firms to replicate this practice.

  • Capital at Risk

Firms must ensure that ‘capital at risk’ warnings are positioned prominently in all marketing communications.

  • Marketing Communications 

Firms must pay particular attention to the design and presentation of SRP-related marketing information to ensure that individual statements, and the tone and overall content, are fair, clear and not misleading (in particular when read together).

Information on key product risks must be presented in a consolidated manner in a dedicated section in the introductory part of any SRP-related marketing communications.

The Central Bank noted that some firms also include dedicated sections in their product brochures that prominently highlighted the ‘Summary Risk Indicator’ score from the PRIIPS KID (with an explanation as to what that score means). It has encouraged other firms to consider following this approach so as to give further context to the SRP’s risk profile.

  • Risk of Product Restructuring 

Firms must ensure that the risk of product restructuring is disclosed to clients pre-sale (the Central Bank placed particular emphasis on the importance of this in the context of asset-backed securities).

If you would like to discuss the above in more detail, please get in touch with any member of our market-leading Financial Regulation Group.

“The retail investment market is changing rapidly, with an increasing shift away from traditional, capital protected products to more complex, capital at risk products. As complexity increases, so too do the risks to investors and the responsibilities regulated firms have to protect those investors’ best interests.”