Since 2017 the issue of the sale of diamonds carried out through the banking channel has been gaining a more relevant importance in the Italian debate. In particular, the Italian Competition Authority initiated an investigation procedure on unfair commercial practices concerning the methods of promotion and sale of the so-called “investment diamonds” by some specialized companies through the banking channel. At the end of two preliminary investigations, the Italian Competition Authority esteemed severely misleading and omissive the ways in which investment diamonds were offered by two companies also known as “Intermarket Diamond Business S.p.A.” and “Diamond Private Investment S.p.A.”. The unfair practices observed in both companies concerned misleading and omissive information disseminated through their websites and the promotional material prepared by them on the sale price of diamonds.1
More specifically, the Italian Competition Authority found that the market prices were the sales prices freely determined by the companies at a much greater amount than the purchase cost and international benchmarks, the trend in market prices was the trend in the companies’ selling price, annually and progressively increased by sellers, and marketability and resaleability prospects were only linked to the possibility that each company would find other consumers within its own circuit. The Authority also certified that the credit institutions, which are the main channel for the sale of diamonds for both companies, would promote investments to a specific category of their customers interested in buying diamonds and diversify their investments.
According to the investigation results, the fact that the investments were promoted by bank staff and the presence of bank staff at meetings between the two companies and customers provided broad credibility to the information found in the two companies’ promotional material, encouraging many consumers to purchase without any further verification. The Italian Competition Authority also confirmed the companies’ infringement of consumer contractual rights as regards the right of withdrawal and, for Intermarket Diamond Business S.p.A., also of provisions on jurisdiction on disputes.2 The discipline of transparency and fairness on investment services is not in itself applicable to the sale of diamonds or other tangible assets even if it takes place through the banking channel nor, in such cases, is the publication of a prospectus foreseen.
Starting from October 2016, Consob launched investigations both on operators who sold diamonds through websites, on some of which Consob intervened, and on operators who sold diamonds through credit institutions.
The investigation was also launched in order to assess whether the activity of selling diamonds was carried out in accordance with Consob Communication of 6 May 2013 on the “Sale of diamonds through the intermediation of credit institutions” or if it integrated an activity of offering financial products to the public.3
Precisely with reference to the regulation of public offerings of financial products, Consob has conducted in-depth studies on the sale of diamonds through the banking channel to verify whether it could be considered an offer of investments of financial nature. At the outcome of the overall studies carried out, no “contractual mechanisms” were found, such as, for example, promises of restitution, obligations to repurchase or constraints on the enjoyment of the asset which could delineate the recurrence of an offer of a financial product and, therefore, a case of direct competence of Consob. In any case, it is of fundamental importance that potential buyers are informed that these investments may present risks that are not immediately perceivable.
The Bank of Italy therefore underlines that it is important that potential customers receive, from the banks that offer the sale of diamonds, the information to carry out the operations in an informed manner. The Authority affirmed that the banks are responsible for putting in place all the necessary controls to ensure that this activity is carried out in full compliance with the rules. Consequently, the Bank of Italy adopted in early 2017 a communication addressed to the entire banking system asking for precise references on the activity and the safeguards taken to verify whether these risks were adequately guarded. Responses revealed, among other things, that most intermediaries had suspended or discontinued the activity of reporting to customers on the possibility of buying diamonds.
In March 2018, the Bank of Italy sent another communication to the entire banking system on the topic of diamonds, urging banks to refrain from conducting this activity in the absence of full risk oversight. On that occasion, the Bank of Italy reminded banks that even when they intend to provide services that are not banking and financial in nature, they must pay full attention to the cognitive needs of customers. The purpose of this study is also to investigate the issue of selling diamonds as an investment service from a comparative perspective.
In recent years the European Securities and Markets Authority and several national competent authorities have observed investment firms offering products and/or services which are outside the scope of financial services regulation in the European Union but that are offered to investors as investment alternatives to financial instruments (which are defined and regulated under MiFID II). More specifically, the supervisory authorities are concerned that the practice of investment firms, also offering products and services that are not regulated, gives rise to both investor protection and prudential risks.4
In this context, the French Professional Advertising Regulatory Organization, also known as “Autorité de Régulation Professionnelle de la Publicité”, has adopted a recommendation to inform the advertising industry on the regulation of miscellaneous goods brokerage.5 In order to ensure a better protection for savers, the Sapin II Act has introduced a change in the system: no offer on atypical investments can be directly marketed in France on without prior allocation by the AMF of a registration number.6
Article 79 of the Sapin II Law introduces ex ante control by the AMF on investment proposals regarding miscellaneous assets . The Sapin II Law also authorizes the AMF to determine, in its General Regulation, the “minimum guarantees required for an investment intended for the general public” for all investment transactions in miscellaneous assets . Consequently, the AMF is amending Title IV of Book IV of its General Regulation to specify these new provisions.
This new system is now effective, and consequently no offer on miscellaneous assets can be advertised or directly marketed on without prior allocation by the AMF of a registration number on the information document for investors. The AMF recalls the existence of criminal sanctions provided for in the French Monetary and Financial Code in the event of non-compliance with this regulation.
In practice, this change in the system aims for better protection for savers, by guaranteeing consistency in terms of the competencies and integrity of the players, and the requirements and quality of information. At the same time, the Financial Markets Authority, also known as “Autorité des marchés financiers”, has published an updated list of identified new websites offering atypical investments in France without authorization.
As a reminder, miscellaneous asset offerings are atypical investments that purpose the acquisition of rights to an asset by emphasizing its potential direct or indirect financial returns, or having a similar economic effect. Any miscellaneous asset investment offering must be registered with the Financial Markets Authority in order to be marketed. The French Authority draws investors’ attention to the fact that its whitelist of registered asset offerings includes a limited number of offerings.
The Financial Markets Authority has also verified a decline in fraudulent offerings in the field of atypical investments in general, especially in diamonds, forests and livestock, while fraudulent offerings for investments in parking lots, nursing home rooms for the elderly, eco-parking spaces and solar power plants have increased in recent months. The authority also points out that these fraudulent offerings return on a regular and cyclical basis. It urges investors to carry out checks before making any investment and to be especially vigilant when faced with proposals offering high returns, minimizing risk and often resorting to posing licensed financial sector companies or large industrial or retail companies.7
The Italian Commission for Companies and the Stock Exchange calls the attention of investors to the importance of adopting the greatest diligence in order to make informed investment choices. The paper aims to highlight the value of financial education in promoting informed investment decisions that can lead to greater autonomy and protection. By creating demand for financial products tailored to their needs, consumers not only make better choices for themselves but also trigger a virtuous process that can stimulate intermediaries to offer new products and services. Changing the attitude of those who are responsible for economic and financial decisions, increasing awareness of the importance of the decisions to be made and informing themselves for the well-being, even in the long term, of their families is a primary goal of institutions that want to promote financial education.
As a result of the well-known events that in recent years have undermined the relationship of trust between customer and intermediary, one of the problems that requires more attention for operators is the reconstruction of this relationship. If information is the best form of protection for the investor, awareness must be key - the investor must understand the importance of being adequately informed in order to make informed choices that can lead to greater autonomy and greater protection. By creating a demand for financial products that are appropriate to their needs, consumers, in addition to making better choices for themselves, trigger a virtuous process that can stimulate intermediaries to offer new products and services; that’s why “Financial education initiatives, therefore, can bring benefits both for individual citizens and for society as a whole”.
In a sector such as banking and finance where the risk of abuse by intermediaries is always latent, the solution to allow the spread of automated financial services consultancy that is also accompanied by trust and awareness should perhaps incorporate a substantive financial education of the small investor and the saver.
According to the OECD definition, “Financial education is the process by which consumers improve their understanding of financial products and notions and, through objective information, education and advice, develop the skills and confidence necessary to become more aware of financial risks and opportunities, to make informed choices, to understand from whom to seek advice and to take other effective actions to improve their financial well-being”. The literature on behavioral finance identifies investment advice as a means of raising the financial culture of the saver and stem cognitive and emotional errors, thus limiting the gap between observed and optimal choices, according to a Consob study based on data from the Observatory, “Financial knowledge makes perceived skills more aligned with real ones. The most informed individuals, in other words, are more aware of their abilities and therefore, in a position to make better investment decisions than the most overconfident”.
One of the main objectives of the paper is to demonstrate that European legislation should also regulate these atypical financial products. It could be the best way to protect investors and to ensure a level playing field in this essential economic sector.
In line with the European Commission’s goal of “an economy at the service of people” and as announced in the 2023 work program, the Commission is seeking to ensure that the legal framework for retail investment empowers consumers sufficiently, encourages better and fairer market outcomes and ultimately creates the conditions necessary to increase retail investor participation in capital markets.
As outlined in the Retail Investment Strategy, document requested by the European Parliament’s Committee on Economic and Monetary Affairs (ECON), the Commission is concerned that capital markets are not sufficiently meeting the long-term financing needs of European citizens. The Commission has identified a number of significant problems that reduce the ability of retail investors to take full advantage of capital markets.
The analytical results found that: (i) retail investors have difficulties accessing relevant, comparable and easily understandable investment product information to help them make informed investment choices; (ii) retail investors are exposed to an increasing risk of being inappropriately influenced by unrealistic marketing information through digital channels and misleading marketing practices; (iii) there are shortcomings in the way products are manufactured and distributed, linked to conflicts of interest (iv) some investment products incorporate unjustifiably high levels of costs and consequently do not always offer good value for money to the retail investor.8
Differences in the way rules are designed between legal instruments also have the potential to confuse investors and result in different levels of investor protection. One of the main purposes of the Capital Markets Union is to ensure that consumers can take full advantage of the investment opportunities offered by capital markets. In order to achieve this goal, they need be supported by a regulatory framework that enables them to make investment decisions that match their needs and objectives and adequately protects them in the single market.
In line with the European Commission’s objective of “an economy that works for people”, and as announced in the 2023 work program, the Commission is seeking to ensure that the legal framework for retail investments sufficiently empowers consumers, encourages improved and fairer market outcomes and ultimately creates the necessary conditions to increase retail investor participation in capital markets.
Lack of trust is one of the reasons contributing to lower levels of retail participation and it hinders on retail growth potential.9
Regulatory aspects are just one of the elements that can be used to stimulate an increased level of participation of retail investors in financial markets, but they do play a very important role.
Regulation cannot solve all the problems related to the participation of retail Investors in the CMU but institutions should fill this gap and not leave the discipline to the national authorities which, as in Italy, do not deal with the profiles closely related to the investment aspect. It is true that these are atypical instruments, but if it is a question of financial products we should find ways of regulating them in a uniform way and also of ensuring a level of playing field in this area.
One of the main purposes of the Capital Markets Union is to ensure that consumers can take full advantage of the investment opportunities offered by capital markets. In order to achieve this goal, they need be supported by a regulatory framework that enables them to make investment decisions that match their needs and objectives and adequately protects them in the single market. n
