Monaco Update: Marketing of financial products in the Principality – Towards a reinforcement of the licensed companies’ monopoly?

The bill n°1035 amending the law 1.338 of 7 September 2007 on financial activities has been submitted to the National Council on 30 April 2021. It is currently being examined by the Finance and National Economy Committee.

This draft legislation falls within the framework of the accession by the Commission de Contrôle des Activités Financières (CCAF) to the International Organization of Securities Commissions (IOSCO), which should render more efficient the cooperation between national regulators and facilitate the exchange of information regarding the supervision of the markets and intermediaries.

Among the key contributions of this bill, the amendment of the rules relating to the marketing of financial services and products in the Principality is to be highlighted.

Historically these rules rely on the monopoly granted to entities duly licensed by the CCAF to carry out financial activities in the Principality, which entails the strict prohibition of direct marketing of financial products by non-licensed entities.

Despite this monopoly, the market globalization, the new means of communication, and the development of electronic trades render the investors’ protection, in particular retail investors, increasingly complex.

Article 29 of the law 1.338, as amended by draft legislation, reflects a concern for increased protection of the licensed entities’ monopoly in the Principality (A.) and contributes to clarify the legal framework applicable (B.).

 A restatement of the licensed entities’ monopoly…

Article 11 of the bill introduces substantial changes to Article 29 of law 1.338 of 7 September 2007, since the new drafting expressly provides, in paragraph 1, for the prohibition of the marketing of financial services and products issued by non-licensed entities to non-professional individuals:

Initiatives aimed at offering, whatever the location or the means, the financial services or products of a non-licensed entity under the present law to non-professional individuals are prohibited.

This new drafting – which should still be subject to further adjustments prior to its final adoption reflects IOSCO’s recommendations issued on the aggressive conducts of certain offshore distributors, reported in its recommendations, particularly in relation to the boiler rooms and cold calling/e-mailing practices. 

On the one hand, the prohibition, by whatever means, of initiatives aimed at offering the financial services or products of a non-licensed entity to non-professional individuals confers, without doubt, to the authorities some room for maneuver to combat the sophistication of certain fraudulent practices.

On the other hand, and although this new drafting might be further clarified, the latter would have for consequence the strict prohibition of the entering into, by duly licensed entities, of distribution agreements pursuant to which such entities would distribute financial products issued by non-licensed entities to non-professional individuals in the Principality.

However, at this stage, there is no precise definition of professional, which will inevitably raise questions with respect to the scope of the new drafting. Nevertheless, it could be envisaged to use as a reference the MIFID II classification, according to which a professional is «a client who possesses the experience, knowledge, and expertise to make its own investment decisions and properly assess the risks that it incurs.

…which also clarifies its scope

Paragraph 1 of Article 29 of the law 1.338, as it would be amended by the bill, clarifies the scope of the licensed entities’ monopoly, which does not intend to prohibit any marketing in the Principality of financial products issued by non-licensed offshore entities.

Duly licensed entities will therefore continue to offer financial products issued by offshore entities in the Principality, as long as these products are offered to «professionals», upon which, obviously, the institutional investors, the investment funds, and other seasoned professionals.

However, the question of the opportunity – by way of exception and on a purely extraordinary basis – for certain offshore entities to offer direct financial products to Monaco-based financial companies (institutional investors, investment funds, etc.), without any intermediation of CCAF-licensed institutions, remains outstanding. Such scenarios should, given their sensitivity, continue to be assessed on a case-by-case basis.

It should also be noted that the amendments made by the new legislation with respect to the offering of financial services or products remove:

• paragraph 2 of Article 29 of the law 1.338, which provides for the discretionary power of the CCAF to authorize, on an exceptional basis, solicitations of licensed entities at the place of residence of persons, at their place of work or in public places – such discretionary power was, in practice, very rarely exercised; and
• the exemption for credit institutions established in the Principality, which would henceforth be subject to the same regime as all licensed entities regarding the marketing of financial products and would therefore have to carry out their prospective solicitations exclusively in their professional premises.

Finally, even though adjustments in the actual drafting of the bill can be anticipated prior to its adoption, salutary clarification of the rules relating to the financial solicitation is to be made in the context of the accession of the CCAF to the IOSCO and should entail stronger requirements in terms of protection of retail investors.

By M. Arthur Rohmer, Gordon S.Blair Law Firm, Monaco, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact monaco@transatlanticlaw.com

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