In cases where we have detected the incorrect marketing of said securities, we have resorted to the Courts, which have condemned the financial entities to refund the investments lost by clients, with the corresponding interest.
What are preferred shares
Preferred shares are securities issued by a company that do not confer equity holdings neither voting rights. They are of a perpetual nature (they have no maturity date) and their profit value is not guaranteed. It is acomplex instrument with a high risk, in which the capital invested could be lost.
These instruments usually have liquidity through a secondary market with many restrictions, where the issuers themselves usually grant liquidity.
This instrument entails three types of risk:
- Market risk:by not having a maturity date, it is a long-term security and, therefore, exposed to strong variations resulting from the fluctuation of the interest rates.
- Counterpart risk in the interest:the instrument pays an interest rate that can be fixed or variable, but this is usually conditioned upon the company obtaining profits, where, in case the same is not obtained, interest payment is suspended.
- Counterpart risk in the principal:if the solvency of the issuer deteriorates, a loss of value shall be undergone that is a lot higher than a normal bond, given that preferred shares have no maturity date.
The marketing of preferred shares
The financial entities in this country that have commercialised these products, offered the preferred shares as a bond with a quarterly or semi-annual coupon payment, when in reality the preferred shares haverestricted liquidity, but not a maturity date. The issue at hand, therefore, is a product that implies a high market risk as a result of interest rate fluctuation.
Taking into account that, greater complexity in the investment also demands greater qualification and market know-how, the financial entities have assumed the role of professional mediators in marketing these products to individuals.
Consequently, clients entrust the exploitation of their share portfolio to their entity, which comprises not only the conservative administration, but also its exploitation according to profit obtaining criteria, in which thequalification of the bank as expert financier, takes precedence.
In this sense, the action of the same should be diligent, prudent and well-organised, proceeding to its implementation in accordance with the strict instructions of its client, or failing these, considering the best conditions for the client.
Though the client assumes a risk in the operation, the same can demand that the entity that manages its share or fund portfolio, proceed within the parameters of qualified professionalism at the moment of investing.
Regulations demand a legally binding behaviour model for financial mediators that operate in the stock market. The financial entities that carry on this activity are subjectively bound to such rules, due to the generic duties stipulated in arts. 78, 79 and 80 of the LMV, that refers to the body of laws comprised of rules, general code of conduct and internal regulations of conduct.
These are binding upon the financial entity and its employees, being based upon the principle that those credit institutions should be required to comply with their commission of administrating the entrusted securities with diligence and transparency.
Likewise, they are obliged to separate the management of securities entrusted by their clientele from that of their own portfolio, in order to avoid any conflict, giving priority to those of the clients without privileging any of them. Finally, those securities should be administrated as if they were their own.
The marketing of preferred shares
The banking entity should provide truthful, clear, and transparent information, in accordance with article 79 of the Stock Market Law, further to the following:
- Informational Bulletin in accordance with article 30 of the Stock Market Law.
- Information regarding operation and consequences.
- Information regarding maturity dates.