Introduction to the Financial Services Legislation in Italy
(By Associazione Consumatori Piemonte )

The state of Italian legislation on financial services

1. The legal framework

The discipline of the financial intermediation is provided by the Legislative Decree 58 of 24 February 1998, Testo Unico delle Disposizioni in materia di intermediazione finanziaria ai sensi degli articoli 8 e 21 della Legge 6 febbraio 1996 n. 52 (hereinafter also “Consolidated Law on financial intermediation”).
Under such legislation, “financial instruments" shall mean shares and other securities representing equity capital negotiable on the capital market, as well as bonds, government securities and other debt securities negotiable on the capital market.
Moreover, it concerns the futures contracts on financial instruments, interest rates, foreign currencies, commodities and related indices, including swaps and contracts where execution involves the payment of differential amounts in cash.
The superivision on the financial market is assigned both to the Commissione Nazionale per le Società e la Borsa (hereinafter also “Consob”) and the Banca d’Italia (hereinafter also “Bank of Italy”).
The Ministry of the Treasury, the Bank of Italy and the Consob jointly exercise the powers conferred on them in compliance with the provisions of Community law. At the same time, they should apply the regulations and decisions of the European Union and act on recommendations concerning matters governed by the law.
The scope of the supervision is to ensure the transparent conduct of the market players’ and the sound and the prudent management of the authorized issuers and intermediaries, having regard to the protection of investors, the stability and proper functioning of the financial system.
The Bank of Italy has the authority for matters regarding the limitation of risk and the financial stability. The Consob supervises the transparent and proper conduct of the financial intermediaries.
It is evident that each authority has the task to check compliance with the provisions governing the matters within the scope of its authority.
The authorities should operate in a coordinated manner, with a view to minimizing the costs incurred by authorized players, and should notify each other of the measures adopted and the irregularities discovered in carrying out their supervisory activity.
For the purpose of facilitating their respective functions, they exchange data with the competent authorities of the European Union and individual EU states.

1.1. Regulatory powers

The Consolidated Law on financial intermediation assigns to the Bank of Italy the regulatory powers concerning the capital adequacy, the limitation of risk in its various forms and the criteria and prohibitions relating to investment activity, having regard to group relationships.
Consob, after consulting the Bank of Italy and taking into account the different needs of investors in relation to their nature and professional experience, may issue regulatory measures on the procedures, including internal control mechanisms, involved in providing services and keeping records of orders and transactions.
The latter specifically regulates the conduct to be observed in dealings with investors, taking also into account the need to minimize the risk of conflicts of interest.

1.2 Supervisory powers

The Bank of Italy and the Consob, within the scope of their respective authority, may convene the directors, members of the board of auditors and managers and order the convening of the governing bodies and set the agenda for the meeting.
Within the scope of their respective authority, they may require authorized persons to communicate data and information and to transmit documents and records in the manner and within the time limits they establish.
These powers may be exercised in respect of the firm appointed to audit the accounts.
The above mentioned law provides that the board of auditors has the duty to inform them without delay of all the acts or facts it finds in the performance of its duties that may constitute a management irregularity or a violation of the legislative provisions.

1.3 Inspections

It is important to note that both authorities may carry out inspections of authorized issuers and financial intermediaries and require the exhibition of documents and the adoption of measures deemed necessary, in compliance with the provisions of Community law. Each authority shall notify the inspections it undertakes to the other, which may request it to carry out on the spot verifications of matters within the scope of its authority.
Moreover, they could request the competent authorities of an EU state to carry out on-the spot verifications of branches of banks established within the territory of such state or agree on other methods of verification. The competent authorities of an EU state, after notifying the Bank of Italy and Consob, may, directly or by way of persons engaged by them, inspect the branches established in Italy of EU investment firms and banks, which they have authorized.
At this regard, the authorities has signed some agreements with the competent authorities of non-EU states on procedures for the inspection of branches of investment firms and banks established in their respective territories.

2. The Commissione Nazionale per le Società e la Borsa (Consob)

The Consob is an independent administrative authority responsible for regulating and controlling the financial intermediation.
Consob’s activity is aimed at the protection of the investing public and the assurance of the efficiency and the transparency of the market.
Therefore, Consob is the competent authority for ensuring the correct behaviour of securities market participants and the disclosure of complete and the accurate information to the investing public by listed companies.
It controls the accuracy of the facts represented in the public offering circulars related to offerings of transferable securities to the investing public and, if the case, it opens and conducts investigations with respect to potential infringements of insider dealing and market manipulation law.

3. Issuers and intermediaries

The Consolidated Law on financial intermediation states that the provision of investment services to the public, on a professional basis, shall be reserved to investment firms and banks.
Thus, financial intermediaries have to be registered and the issuing of financial instruments has to be authorized by the Consob, after it has controlled the fulfillment of some conditions, for example, that the paid-up capital is not less than that established on a general basis by the Bank of Italy.

3.1. Managers and auditors

Persons performing administrative, managerial or control functions in the asset management companies and in the other financial intermediaries shall fulfil the experience and integrity requirements established by the Minister of the Treasury in a regulation, that has been adopted after consulting the Bank of Italy and Consob.
Failure to fulfil the requirements shall result in disqualification from office. The disqualification shall be declared by the board of directors within thirty days of the appointment or of its learning of subsequent failure.
In the event of inaction by the board of directors, the disqualification shall be declared by one of the authorities.

3.2 Sanctions (some examples of)

Under the Consolidated Law on Financial Intermediation, a penalty of imprisonment for a term of between six months and four years and a fine shall be inflicted on any person who, without being authorized pursuant to the law, provides investment services or collective asset management services, markets units or shares of collective investment undertakings in Italy. The same sanction is provided for persons who sell financial instruments or investment services door-to-door or use means of distance communication to promote or sell such instruments and services.
Unless the act constitutes a more serious offence, any person who, in performing the service of management on a client-by-client basis of investment portfolios in violation of the provisions governing conflicts of interest, undertakes operations that cause injury to investors with a view to obtaining an undue profit for himself or for others, shall be punished by imprisonment for a term of between six months and three years and by a consistent fine.

4. Consumers’ protection in the financial market

Under the Consolidated Law on Financial Instruments and the other Italian relevant legislation, there are different ways to protect investors from unlawful conducts carried on by the players involved in the financial market (i.e. banks, intermediaries, companies).

4.1 Complaint to the bank or to the intermediaries

The consumer is entitled by the law to send a complaint directly to the bank or to the financial intermediary.
At this regard, we note that the Consob has published some rules and practical suggestions for dealings with intermediaries, for example, by inviting investors to:
- check the prescribed authorizations
- obtain the necessary information
- beware of proposals that are too good to be true
- think twice about investing in risky products
- insist that the contract is concluded in the prescribed manner
- pay in the prescribed manner
In any case, the Consolidated Law on Financial Intermediation provides that every bank or financial intermediary must keep an appropriate registry of the claims, in which the data related to each complaint must be promptly recorded.
The banks and the intermediaries are, then, required to answer within 90 days of receiving a complaint (see article 59.3 of the Consob Regulation 11522/1998).

4.2 Complaint to the Consob

All those involved in financial services (listed companies and their shareholders, intermediaries and their customers, trade associations, consumer protection organizations, investment advisors and financial salesmen, etc.) can send Consob reports on irregularities and complaints about malfunctions, mistakes or violations of rules of conduct in their dealings with operators subject to supervision.
Such reports and complaints are a valuable source of information for Consob in the performance of its supervisory duties, because they can help it to detect and suppress illegal and unfair behaviour and practices.
The authority is not automatically required to take any action upon receiving a report or a complaint, nor is it under any obligation to the person who submitted it. Investigations are launched only when the facts concern matters falling within the scope of Consob’s powers and are corroborated by sufficient evidence.
Reports and complaints should contain:
- the name and address of the person or company making the report or complaint and a telephone number where they can be reached for any clarifications;
- a short description of the circumstances, the reason for the report or complaint and the name of the operator involved;
- copies of any document concerning the report or complaint (e.g. investment services agreements, statements of operations, etc.);
- copies of any correspondence with the operator in question.
We note that the Consob can not directly protect the property or other rights of persons submitting reports or complaints; such protection can only be provided by the courts. The investigations it carries out are intended to find evidence of violations of the rules and regulations in force and to punish them in the more general interest of protecting the public’s savings.

4.3. The Ombudsman

The banking Ombudsman, that is competent only for claims by the consumers within a very limited value, has been established in 1993 under the agreement of the major Italian banks.
It is an independent body that investigates customer complaints against financial services providers, including banks and other deposit-taking organizations, investment dealers, mutual fund dealers and mutual fund companies.
The aim is to provide prompt and impartial resolution of complaints that customers have been unable to resolve satisfactorily with their financial services provider.
The Ombudsman process is, thus, based on the simple principle that every client deserves a fair and prompt resolution of complaints.
The Ombudsman's decision on the resolution of a complaint is based on some basic criteria: overall fairness, good business practices, accepted industry standards and practices and standards established by industry regulatory bodies, professional associations or the individual financial services provider.
It should solve the case within 90 days from the receipt of the complaint and its decision is binding for the credit institution in question.

5. Envisaged reforms

5.1 The market abuse directive (2003/6/Ce)

The 3rd February 2004 the Italian government has presented to the Parliament a draft of a new legislation regulating the financial market.
The new legislation would put into effect in the Italian law on finance the provisions of the directive 2003/6Ce of the European Parliament and of the EU Counsel of January 28, 2003 relative to the abuse of privileged information and market manipulation (“abuses of the market”).
According to article 6, paragraph 5 of the same, “The member states ensure that there are adequate norms which guarantee that persons who produce or propagate research regarding financial instruments or issuers of financial instruments or persons who produce or propagate other information recommending or proposing investment strategies intended for propagation and information channels to the public, exercise reasonable caution and diligence so that information is presented correctly and communicate their interest in such or indicate that a conflict of interests exists regarding the financial instruments to which the information refers”.
Actually, by the EU communitary law of 2003, the Italian Government has been delegated to adopt the legislative decrees, which will bring about the necessary norms in order to put into effect the directive under examination within 18 months from the date of the law going into force.

5.2 A new authority

The envisaged reform has been urged by the recent financial crises of the Italian companies Parmalat and Cirio, both due the companies’wrongful management and the lack of effective control.
Parmalat is the largest Italian food company and the fourth largest in Europe, controlling 50% of the Italian market in milk and milk-derivative products. In December 2003, it was discovered that its claimed liquidity of 4 billion euro did not exist, and that EU 8 million in bonds of investors' money had evaporated as well. Parmalat is the largest bankruptcy in European history, representing 1.5% of Italian GNP, proportionally larger than the combined ratio of the Enron and WorldCom bankruptcies to the U.S. GNP.
Behind Parmalat's facade as a productive agro-industrial company with 34,000 employees, hides a giant financial speculative scheme to lure investors' money and syphon it off through a network of 260 international offshore speculative entities, where the money disappeared.
The government reaction to such crises consists in designing a new authority, which is supposed to assume the supervisory powers which the Bank of Italy had, but has never implemented.
The scope of the proposed reform is to assure "the protection of the saving and of the investor, the confidence of the market, the transparency and the correctness of the behaviours of the subjects supervised and the observance of the regulating dispositions of the competence matters ".
The new authority shall incorporate the present tasks assigned to the Banca d’Italia, with specific reference to the control on the issuing and the negotiation of the financial instruments towards the private investors.