Global securities regulators issued a report Monday that sets out a series of principles designed to ensure that firms distributing complex financial products ensure their sales are suitable.
The International Organization of Securities Commissions (IOSCO) published a final report that aims to promote investor protection with the introduction of nine principles relating to the distribution of complex products.
IOSCO notes that, while complex financial products may not be necessarily more risky than standard financial instruments, “they typically have terms, features and potential investment risks that may make it difficult for many customers, even non-retail customers, to appreciate fully.”
Indeed, the regulators say that the global financial crisis “raised serious concerns that the growing complexity of financial products made the associated investment risks less apparent to customers”. It points to the collapse of Lehman Brothers in September 2008, in particular, as an event that highlighted the extent to which intermediaries failed to assess the suitability of structured investment products.
The report includes recommendations that dealers should be required to adopt policies and procedures to distinguish between retail and non-retail customers when distributing complex financial products; that they should be required to act fairly and honestly, and to disclose and mitigate conflicts of interest, regardless of the sort of client. It also proposes certain disclosure requirements, and suitability principles to follow both for advisory and unsolicited services.
Additionally, it recommends that dealers understand the product well enough to have a “reasonable basis” for any advice they provide; that they establish internal policies and procedures that support compliance with suitability requirements; and, that they should develop “appropriate incentive policies designed to ensure that only suitable complex financial products are recommended to customers”.
And, for regulators, it says they should supervise and examine dealers on a regular basis to help ensure dealer compliance with suitability and other customer protection requirements.
“These principles provide guidance for IOSCO members and reflect the current regulatory state of play and leading practice in the distribution of complex financial instruments by intermediaries among IOSCO’s members,” said Stephen Po, chair of the IOSCO committee that drafted the report. “IOSCO is aware that this is an area undergoing constant change and innovation. It will continue to monitor closely future market and regulatory developments which may lead to further policy work in the future.”