NBS scrutinised corporate bond sales: what distributor inspections revealed

Selling corporate bonds to retail investors is a common way for Slovak companies to borrow outside banks. The National Bank of Slovakia considers most such bonds risky and guides retail distribution through a supervisory benchmark. It has also checked distributors’ compliance. Issuers and sellers should understand both the benchmark and those findings.

What is the supervisory benchmark?

The benchmark is a statement by NBS’s Capital Market Supervision Department on retail distribution of corporate bonds. First issued on 28 April 2021, it was replaced by the revised version of 30 April 2024. It is not legislation. NBS describes it as a transparent expression of expectations and minimum expected distribution standards.

The product profile explains the focus. Targeted bonds usually lack ratings and a liquid secondary market. Issuers are often newly formed special-purpose companies without a track record, with guarantees from another company in the same holding. If the issuer has trouble, the guarantor often does too. NBS therefore describes complex bonds as high-risk instruments suitable only for a narrow client group able to bear that risk.

Statutory basis: MiFID II conduct rules

The benchmark creates no new duties; it specifies those already imposed by Securities Act No. 566/2001 Z. z. following MiFID II implementation. The foundation is the general conduct rule.

Unofficial English translation:

When providing investment or ancillary services and performing investment activities, an investment firm must act in accordance with fair commercial dealing, honestly, fairly and with professional care in its clients’ interests.

— § 73b(1) of Act No. 566/2001 Z. z.

Further duties cover product governance and target-market identification (§§ 71m and 71n), conflicts (§ 71l), commissions, permitted only if they improve service quality and do not impede acting in clients’ interests (§ 73b(2)), and clear, understandable, non-misleading information including marketing (§ 73c). The simplest bonds without embedded derivatives benefit from a product-governance exemption (§ 71o), but the high-risk bonds targeted by the benchmark are covered.

What NBS found

At an October 2022 market workshop, NBS described two phases of off-site supervision: internal processes and theoretical preparedness, followed by a sample of actual client transactions. Nine entities were selected: two banks, three investment firms and four independent financial agents. Only one fully implemented the benchmark in both processes and sampled transactions; six implemented it partly and two not at all.

Recurring deficiencies concerned core client protections. Target markets did not ensure bonds reached only the narrow group capable of bearing high risk. Investment questionnaires relied on self-assessment, effectively letting clients determine their own assessment results. Suitability statements inadequately described findings and were not personalised. Financial agents adopted institutions’ target markets without their own assessment. NBS also highlighted disguised investment advice: entities claimed not to advise but in fact performed suitability assessments.

NBS noted good practice too: detailed financial analyses of issuers and bonds, use of its corporate bond information card, information barriers for conflicts, seller training before launch, disqualifying questions in appropriateness tests, remuneration primarily based on qualitative criteria and mystery shopping to check sales quality.

What issuers need to prepare

The benchmark addresses distributors, but distribution makes an issue marketable, so it affects issuers too. Distributors need financial-analysis and target-market materials: understandable statements, the real purpose of the issue and disclosure where proceeds refinance debt. Marketing supplied to sellers must satisfy § 73c. See prohibited wording in bond marketing. Remember that only an investment firm or bank may place an issue, and prospectus approval is not a seal of safety: NBS does not guarantee issuer quality.

What distributors must address and the consequences

The findings yield a precise task list: independent target-market assessments even by financial agents, questionnaires without self-rating, personalised suitability statements, commissions justified by service quality enhancement and documentation proving it all. NBS notified distributors of deficiencies and revised the benchmark. Stronger tools are available: under Securities Act § 144, it may impose corrective measures and fines and suspend marketing or sale of an instrument where product approval processes fail.

Making this work for you

An issuer whose materials meet benchmark expectations is easier for distributors to work with and better placed to reach the right investors. We assist from documentation to target-market materials through bond issues in Slovakia. Public offer assessment addresses offering boundaries, and investor entry is relevant if you are considering equity instead of debt.