Esma shrugs off fears that Prospectus Directive amendments will bring higher costs but little benefit

Issuers say investors will not benefit from amendments to the EC’s Prospectus Directive, but Esma maintains the new requirements serve a purpose

Six months after its implementation by European Union member states, market participants say the latest amendment to the European Commission’s Prospectus Directive (PD) will lead to higher costs and less innovation, but the European Securities and Markets Authority (Esma) appears unmoved by the criticism.

Issuers and industry representatives say investors will not benefit from the additional information to be included in the base prospectus because they place little reliance on that document or the final terms.

However, Vicki Erfurt Larsen, corporate finance policy officer at Esma, told Structured Products: “If investors choose not to use the information at hand, that is their choice. However, that is not something we can take into account when we are making the rules because the prospectuses are intended to provide necessary information for an informed decision about the issuer and the investment. It is the only document that is currently in place that collects all the information on the issuer and the product in one place for the investor to read and understand.”

Amending Directive 2010/73/EU, which came into force in December 2010 and was to be implemented by member states by July 2012, provides that final terms to a base prospectus should contain only information relating to the securities note which is specific to the issue and which can be determined only at the time of the individual issue. All other information should now appear in the base prospectus.

“Issuers will need to overhaul their programmes. JP Morgan is actively considering structural changes to its programme, but we haven’t gone there yet,” says Tim Hailes, London-based managing director and associate general counsel at JP Morgan and chair of the Joint Associations Committee on Retail Structured Products.

Pierre Lescourret, head of structuring for Europe, cross asset solutions, at Société Générale (SG) in Paris, says: “There is a lot of legal and operational work for issuers in terms of adapting the issuing process internally, adapting IT systems and reviewing the documentation itself.” He estimates that the size of SG’s base prospectus will grow by 30% as a result of the amending directive.

While issuers are certain that costs have risen as they look to comply with the amending directive, they express less certainty about the benefits for investors. “I am not totally convinced the summary contained in the final terms will be that useful to investors,” says Lescourret. “Clients look at the term sheet or marketing brochures, which are subject to review by regulators on a case-by-case basis, but not the base prospectus or the final terms.”

Esma says it was alert to the messages coming from the market and says it asked all stakeholders – such as issuers, trade organisations and competent authorities – for input when delivering its advice on the amending directive to the European Commission.

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