IOSCO Reviews Application of Principles on Complex Financial Products
IOSCO published a report on findings of the thematic review of the implementation of the IOSCO principles on suitability requirements for distribution of complex financial products. These nine IOSCO principles on suitability requirements were published in January 2013. The review aimed to understand the way IOSCO member jurisdictions have implemented these suitability standards. The review concluded that the majority of participating jurisdictions have implemented suitability requirements for complex products in a manner generally consistent with the IOSCO principles.
The review considered different regulatory models and intermediary distribution channels, including the ways fintech has impacted the suitability space. While only five jurisdictions earned ratings of "Fully Consistent" across all nine of the principles, the review team rated the majority of the remaining jurisdictions as "Fully" or "Broadly Consistent" across most of the principles. The review team observed that, in some cases, jurisdictions rated "Partly Consistent" or "Not Consistent" for some principles had reforms in progress, which may improve these ratings once implemented. The following are the key findings and observations from this review:
- Participating jurisdictions generally had product-complexity-neutral suitability regimes.
- What constitutes a complex financial product differs among jurisdictions.
- Most jurisdictions have standards for dealing with customers fairly and for dealing with conflicts of interest
- Many participating Jurisdictions do not require intermediaries to consider product riskiness or complexity in connection with classifying some customers
- The robustness of suitability regimes appears to correlate to levels of market development and participation
- Fintech development in respect of digital advisers and online platforms has created new suitability-related challenges
The review focuses on business conduct and the risks posed by complex financial products and is consistent with the core IOSCO objective of investor protection. For the purpose of this review, “complex financial products” refer to financial products whose terms, features, and risks are not reasonably likely to be understood by a retail customer because of their complex structure (as opposed to more traditional or plain vanilla investment instruments) and which may be difficult to value. Thus, all IOSCO members that have complex financial products were invited to participate in the review. Twenty-nine IOSCO members from 28 jurisdictions participated in the review. The participating jurisdictions included both developed and growth and emerging market jurisdictions.
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Keywords: International, Banking, Securities, Thematic Review, Complex Financial Products, Suitability Requirements, OTC Derivatives, Asset-Backed Securities, Credit Default Swap, IOSCO
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