Consob’s probability table courts favour in Italy

Italian regulator Commissione Nazionale per le Società e la Borsa (Consob) is making progress with the introduction of its ‘Quaderni di Finanza’, a series of recommendations designed to allow retail investors to make informed investment decisions.

Published in April 2009, at the heart of the recommendations is a probability table that offers investors a view on the relative outcomes of the structured product on offer when compared to a risk-free investment.

The risk-free element is taken to be a government bond and investors are offered data on four probable outcomes: first, the final value of the invested capital is lower than the notional capital; second, the final value of the invested capital is higher than or equal to the notional capital, but lower than the final value resulting from investing the notional capital in the risk-free asset over the same time horizon; third, the final value of the invested capital is higher than the notional capital, and in line with the final value resulting from investing the notional capital in the risk-free asset over the same time horizon; and, fourth, the final value of the invested capital is higher than the notional capital, and higher than the final value resulting from investing the notional capital in the risk-free asset over the same time horizon.

Prefixed with the observation that “no matter what type of financial structure they may have, non-equity investment products are similar to gambling”, the Consob document aims to level the playing field for all the investments on offer to retail investors.

The approach has so far been adopted by the country’s insurance industry, and bank providers are expected to follow suit by January 2010. As a ‘recommendation’, the guidance does not stand above the law, particularly those relating to the Key Information Document that the European Commission is currently considering.

The recommendations have not been welcomed universally, however. “Structured products are often contrarian and against the market… government bonds are not always the right benchmark… and returns from structured products are not linear because they include options,” says Anna Carbonelli, head of the product hub at Banca IMI in Milan. “The only advantage [of the probability table] is that it is simple.”

Other providers were concerned about complexity. “The regulator’s ambition for a clear and simple documentation has not yet translated into brief and retail-friendly prospectuses,” says Fabio Filippi, London-based head of retail  and private banking structured products for Italy at BNP Paribas. “The objective of the simulations is to provide investors with an unambiguous, simple way of understanding whether the investment is appealing (for example, the probability of beating the risk-free investment) and appropriate (the probability of having negative returns). It is a good approach the drawback that the assumptions behind the simulations are complex and not retail-friendly, for example in relation to the computation of the risk-free investment, which is performed on theoretical grounds only.”