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Europe – Risk Factor Guidelines

Europe – Risk Factor Guidelines

In any prospectus, risk factors have always been a way to mitigate liability for the information contained in it. This has been misused and manipulated for a layperson to thoroughly understand due to the lengthy description in addition to legal jargon and ambiguous phrases. On 1st October 2019 European Securities and Markets Authority have proposed and finalized new guidelines on risk factors. Competent authorities in the EU are expected to comply with these guidelines to facilitate their review of risk factors. These guidelines are to be complied with from the 4th of December 2019; however, many authorities have already been observing these guidelines referring to ESMA’s final report as guidance. The new guidelines provide guidance to both the content and the presentation of these risk factors.

As for content in relation to risk factors; they must:

  • Describe the relevant risk and not just mention generic factors or boiler-plate clauses
  • Be clear about the quantitative or qualitative disclosure
  • Demonstrate the above factors even if disclosed elsewhere in the prospectus in a clear manner

As for presentation about risk factors; they must be

  • Categorized
  • Focused
  • Listed in summary in each category

This concept is detailed in the guidelines passed in 2019 with comprehensive examples by ESMA which is to be followed by competent authorities.