On 26 September 2019, the International Organization of Securities Commissions (IOSCO) published a final report presenting its findings from its thematic review on suitability requirements with respect to the distribution of complex financial products. The review is based on the legislative, regulatory, and policy measures reported by 29 IOSCO members from 28 jurisdictions that implemented the nine principles set out in IOSCO’s suitability requirements with respect to the distribution of complex financial products report that was published in January 2013.

The IOSCO principles focus on the application of suitability and related requirements to intermediary services including selling, advising, recommending and managing discretionary accounts/portfolios. The principles also address intermediaries’ incentives, conduct and responsibilities in relation to both advisory and non-advisory services as well as the regulator’s role in supervision and enforcement.

For the purposes of the review, “complex financial products” refer to financial products, whose terms, features and risks are not reasonably likely to be understood by a retail customer (as that term is defined in individual jurisdictions) because of their complex structure (as opposed to more traditional or plain vanilla investment instruments), and which may be difficult to value (i.e. their valuations require specific skills and/or systems, particularly when there is a very limited or no secondary market).

Key findings and observations from the IOSCO review, which was a desk based exercise, show that the majority of participating jurisdictions have implemented suitability requirements generally in line with the principles and have standards for dealing with customers fairly, and for dealing with conflicts of interest. Also, the robustness of suitability regimes appears to correlate to levels of market development and participation. However, IOSCO found that most jurisdictions did not have bespoke requirements specifically for complex products and jurisdictions had different opinions as to what constitutes a complex financial product. Additionally, new suitability-related challenges have appeared with the advance of FinTech developments in respect of digital advisors and online platforms.

On page 5 of the final report IOSCO sets out a table providing an overview of each participating jurisdiction’s consistency with each of the principles.

In light of this, IOSCO recommends that jurisdictions consider:

  • whether regime enhancements would strengthen the relevant frameworks where gaps are identified between any one regulatory system and the principles;
  • whether their suitability regimes address complex products specifically, or are sufficiently sensitive to products of increasing complexity. Where jurisdictions apply bespoke requirements for complex products, they should establish clear criteria to aid intermediaries in distinguishing complex products from non-complex products;
  • incorporating further consideration of product knowledge and experience into decisions relating to the classification of non-retail customers;
  • enhancing disclosure requirements to ensure that customers have sufficient information to base informed investment decisions and to understand the advice they receive from intermediaries;
  • whether their regimes provide sufficient direction on the product due diligence element of the suitability assessment process; and
  • making regular use of supervisory tools across all intermediaries that provide complex products and to ensure that intermediaries take corrective action where their behaviour falls short of expectations.