The past two years or so have seen fierce competition in the Belgian structured products market, and product choice has been on the increase too. Clients used to consist of only OLO (Belgian Bunds) investors, plain vanilla bond investors or those willing to accept more risk by investing in funds. But competitive market conditions have forced banks to come up with issues that attract sales with lower costs. Issuing structured notes within a fund has also become more popular.
The following points provide an overview of the factors that distributors currently need to consider when issuing products in Belgium.
Issuance in Belgium is relatively expensive because average volumes are low compared to costs. Local regulations are very tough and approval is usually required from the CBFA (Banking, Finance and Insurance commission), which is the supervisory body for the country's financial sector.
Three types of structured product can be issued: funds, notes and insurance products. Most are regulated by the CBFA, and a distinction must be made between private and public issues. As a rule of thumb, issues with denominations of more than e250,000 are considered as private offerings. One of three features defines a public issue: publicity, the use of non-professional intermediaries, or approaching more than 50 people. The need for regulatory approval and documentation costs makes them difficult to issue for sizes under e5 million.
The existing rules will change in July, when the European investment directive comes into effect with the aim of creating a European standard.
Funds are subject to obligatory annual checks by auditors and the CBFA and are therefore the most expensive method of offering structured products to retail clients. For private placements, on the other hand, the costs are negligible. The administration of pension funds has a cost structure close to those of funds.
Regardless of issue type, all coupon payments (before maturity) in Belgium are submitted to a withholding tax of 15%. If a structure pays annual coupons it makes no sense to put them under more expensive fiscal set-ups than notes.
If no coupons are paid, the final customer will profit more from structures under funds or pension fund schemes, because no withholding tax is liable on the capital gains. For structures in between these two extremes, it is up to the client or consultant to choose the most appropriate scheme.
Investors must ensure they check whether or not a structure they like propose a capital guarantee, and if the guarantee exceeds 100%. If the structure has an above-par reimbursement, then maturity becomes the driving parameter. Withholding tax will not be due if the structure has a maturity of more than than eight years, so most Belgian capitalisation structures have maturities of between eight and 10 years.
Odd one out
As if to confuse everyone, reverse convertibles have always been the odd one out under Belgian law, which states that withholding tax is due for investment products with a capital guarantee. However, gains on speculative instruments (as stocks or options) are not taxed. Reverse convertible structures in Belgium have historically been put under the form of a note. Unfortunately, however, the reverse coupons are not exempt from withholding tax.
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