English version N. 63 Studi e Ricerche  (April 2009)
JEL Classifications: C02, C32, C51, C61, G11, G17, G20, G32, G38, K23
Key Words: transparency, risk, return, investment time horizon, unbundling, risk-free asset, benchmark, prospectus, product information sheet, volatility, GARCH, stochastic process, probability scenarios, key information document, first passage times, pricing, payoff, fair value, mark-up, mispricing, risk-neutral measure, martingale, migration.

by the Quantitative Analysis Unit – Consob

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The purpose of the transparency on the risk profile of non-equity investment products is to allow investors to take informed investment decision. In an international framework characterized by an increasing globalization of markets and a growing integration of banking, asset management and insurance activities, the traditional use of narrative descriptions of the various risks is no longer effective. On the contrary, it would be better to use synthetic indicators which are immediately comprehensible to investors and defined in relation to robust and objective quantitative metrics. The result is a risk-based approach to transparency built on three pillars: the recommended investment time horizon, that is the investment horizon which is compatible with the investor's liquidity preferences, the potential returns that the non-equity investment product can offer to the investor, and the degree of risk associated with that product.
The information obtained from these three pillars allows to determine the essential elements of the financial investment, both for the purposes of the disclosure to be provided in offering prospectuses, and for the suitability tests performed by distributors.
To ensure a concrete implementation of the risk-based approach to transparency, the current fragmentation of the EU regulatory framework should be overcome through the issuing of a single directive on the transparency of non-equity investment products able to concretely realize the levelling the playing field principle. In this perspective, the Italian law-maker could intervene to align the transparency requirements of class I policies to those of the financial-insurance products already under the Consob supervision.

Authors: Marcello Minenna (m.minenna@consob.it), Giovanna Maria Boi (g.boi@consob.it), Antonio Russo (a.russo@consob.it), Paolo Verzella (p.verzella@consob.it), Adele Oliva (a.oliva@consob.it)

The authors wish to thank Giuseppe D'Agostino for his useful comments and suggestions.