IOSCO Examines Efforts to Prevent Mis-Selling of Complex Financial Products

Steven Lofchie Commentary by Steven Lofchie

IOSCO examined member regulators' progress toward implementing suitability standards designed to prevent the mis-selling of complex financial products.

IOSCO published the findings in a final report, "Thematic Review on Suitability Requirements with respect to the Distribution of Complex Final Products," following an assessment of 29 IOSCO members from various developed and emerging market jurisdictions. Among other things, IOSCO found that:

  • none of the participating jurisdictions reported having a separate suitability regime for complex products;

  • most jurisdictions have established standards for treating customers fairly and addressing conflicts of interest;

  • most jurisdictions mandate that an intermediary distinguish between complex and non-complex products even though, as IOSCO pointed out, what constitutes a complex financial product differs among jurisdictions;

  • the majority of jurisdictions permit intermediaries to categorize certain types of customers as "non-retail" based on (i) the nature of the entity or (ii) specific monetary thresholds without considering the complexity or riskiness of the relevant product; and

  • new suitability-related challenges have emerged as a result of FinTech developments concerning digital advisors and online platforms.

Additionally, IOSCO urged jurisdictions to consider improvements disclosure requirements to support customers in (i) making informed investment decisions and (ii) understanding the advice given to them by intermediaries.

Commentary

Among the concerns raised by IOSCO was the use of robo-advisers, whether customer information analyzed by such advisers was sufficient, and whether the advisory algorithms were robust enough. Whatever the worries that the regulators may have, it seems clear that the market will move increasingly in towards automation, as a result of both improvements in technology and increases in regulation (e.g., Regulation Best Interest) that impose substantial costs on firms providing sporadic investment advice to small customers.

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