Presentation on theme: "Disclosure and Transparency and other Regulatory Measures to Prevent Mis-selling of Financial Products 28 October 2013 Stephen Po Senior Director, Intermediaries."— Presentation transcript:
1 Disclosure and Transparency and other Regulatory Measures to Prevent Mis-selling of Financial Products28 October 2013Stephen PoSenior Director, Intermediaries Supervision, Hong Kong Securities and Futures CommissionChairman, IOSCO Standing Committee on Regulation of Market Intermediaries
2 Outline Regime for information disclosure and transparency Key requirements relating to information disclosureReducing mis-selling of financial productsIOSCO’s efforts in enhancing regulation of selling of investment productsMajor challenges ahead
3 Information Disclosure and Transparency (I) Regime forInformation Disclosure and Transparency
4 Information Disclosure Disclosure of key product information by product issuersKey factsInvestment objectives and strategyKey featuresKey risksFees and chargesAny guarantee/ collateralScenario analysis / performance of the product
5 Information Disclosure Disclosure of key information by product distributorsMake adequate disclosure of relevant material information in its dealings with its clientsNot advise or deal in relation to a transaction for which it has an actual or potential conflict of interest unless it has disclosed that material interest or conflict to the client and it has taken all reasonable steps to ensure fair treatment of the clientDisclose to clients benefits received from the product issuer for distribution of investment productsDisclose to clients sales related information, e.g. whether it is acting as principal or agent and its affiliation with the product issuer
6 Examples of Product Related Disclosure Requirements i) Marketing MaterialsGeneral principles: The marketing materials should:not be false, biased, misleading or deceptivebe clear, fair & present a balanced picture with adequate risk disclosurecontain information that is timely & consistent with offering documentsSpecific content requirements covering the following key areas:the use of language and graphics: should not give the impression that investors cannot lose money or profit without risks (e.g. safe, promise)the financial performance and comparative information disclosurethe inclusion of warning statements
7 Examples of Product Related Disclosure Requirements ii) Offering document and Product Key Facts Statements (KFS)Offering document: list out the product nature, structure, terms and conditions, risk factors, financial information, etcKFS: a standardized template summarizing key features and risks of products to help investors to understand and compare different products:Basic features:Quick factsProduct description (e.g. investment objectives, strategy, key risks, etc)Additional information (e.g. the frequency of the NAV calculation)
8 Examples of Product Related Disclosure Requirements (cont’d)Unique features specific to each product class, e.g.:General fundadditional risk disclosure if the fund will invest in financial derivative instruments for investment purposesGuaranteed fund / fund with structured pay-outskey terms of the guaranteeperformance analysis under worst, base and best case scenarios of the structured pay-outsIndex fundconstituent stocks making up the underlying indexcollateral/counterparties for funds using synthetic replication strategies
9 Disclosure Sample of a Structured Investment Product Key features:special features such as callable and airbagmax potential gain & conditions for this to be achievedvarious payout scenariosMode of settlement:Cash or physical settlement upon maturityQuick facts:offer period, issue price & date, min investment, maturity date, max loss/gain, product typeFees and chargesKey risk factors:Not same as investing in the underlying assetsmax potential gain is cappedNot principal protectedDetails of guarantee/collateralCooling off period:How longHow to exercise the rightHow to calculate the refundScenario analysis:best, middle-of-the road and the worst case scenariosContinuing disclosure obligations:issuer ceases to meet any of the eligibility requirementsfailure of a material portion of the collateral
10 (II) Reducing Mis-selling of Financial Products
11 Growth Opportunity in the Selling of Capital Market Products Wealth accumulation worldwideCapgemini and RBC Wealth Management World Wealth ReportPopulation of high net worth individuals (“HNWIs”) increased to 12 million in 2012 (11 million in 2011) and overall wealth amounted to US$46 trillion (US$42 trillion in 2012)HNWIs mean those individuals with US$1 million or more at their disposal for investmentWealth management/ financial advisory services in the Capital Market is a growth businessPool of wealth is growing and the need for capital preservation is greatInvestors are demanding yield enhancement under low interest rate environment
12 Examples of Cases Involving Investor Losses European countries, e.g.Germany – “Zertifikate” sold by banks to private investorsSpain – Lehman productsUK – Interest rate derivatives, Isa funds & investment bondsHong Kong and Singapore– Lehman Minibonds
13 IOSCO’s Efforts in Enhancing Regulation of Selling of Investment Products “Point of Sale Disclosure” Report published in Feb 2011 covering what key information that customers ought to receive at the point of sale in order to support sound investment decision making6 principles on Key Information:Disclose to investors fundamental benefits, risks, terms and costs of the product and intermediary remuneration and conflicts.Provide such information to investors for free before the point of sale to help them make an informed decision about whether to invest.Deliver or make the information available in a manner that is appropriate for the target investor.Should be in plain language and in a simple, accessible and comparable format to facilitate a meaningful comparison with competing products.Should be clear, accurate and not misleading to the target investor. Disclosures should be updated on a regular basis.When making rules for intermediaries and product producers, regulators should consider who has control over the information to be disclosed.
14 IOSCO’s Efforts in Enhancing Regulation of Selling of Investment Products “Suitability Requirements with respect to the Distribution of Complex Financial Products” Report published in Jan 2013 set out 9 principles relating to the distribution of complex financial products by intermediariesThe 9 principles cover the following areas:Classification of customersIntermediaries should be required to adopt and apply appropriate policies and procedures to distinguish between retail and non-retail customers when distributing complex products. The classification of customers should be based on a reasonable assessment of the customer concerned, taking into account the complexity and riskiness of different products. The regulator should consider providing guidance to intermediaries in relation to customer classification.
15 IOSCO’s Efforts in Enhancing Regulation of Selling of Investment Products General duties irrespective of customer classificationIntermediaries should be required to act honestly, fairly and professionally and take reasonable steps to manage or mitigate conflicts of interest through implementing appropriate procedures in the distribution of complex financial products, and where there exists a potential risk of damage to the customer’s interest, the intermediaries should, where appropriate, be required to clearly disclose the risk.Disclosure requirementsCustomers should receive or have access to material information to evaluate the features, costs and risks of the complex financial product. Any information communicated by intermediaries to their customers regarding a complex financial product should be communicated in a fair, comprehensible and balanced manner.Protection of customers for non-advisory servicesWhen an intermediary sells a complex financial product on an unsolicited basis (no management, advice or recommendation), the regulatory system should provide for adequate means to protect customers from associated risks.
16 IOSCO’s Efforts in Enhancing Regulation of Selling of Investment Products Suitability protections for advisory services (including portfolio management)An intermediary should be required to take reasonable steps to ensure that recommendations, advice or decisions to trade on behalf of a customer are based upon a reasonable assessment that the structure and risk-reward profile of the financial product is consistent with such customer’s experience, knowledge, investment objectives, risk appetite and capacity for loss.An intermediary should have sufficient information in order to have a reasonable basis for any recommendation, advice or exercise of investment discretion made to a customer in connection with the distribution of a complex financial product.Compliance function and internal suitability policies and proceduresIntermediaries should establish a compliance function and develop appropriate internal policies and procedures that support compliance with suitability requirements, including when developing or selecting new complex financial products for customers.
17 IOSCO’s Efforts in Enhancing Regulation of Selling of Investment Products IncentivesIntermediaries should be required to develop and apply appropriate incentive policies designed to ensure that only suitable complex financial products are recommended to customers.EnforcementRegulators should supervise and examine intermediaries on a regular and ongoing basis to help ensure firm compliance with suitability and other customer protection requirements relating to the distribution of complex financial products. The competent authority should take enforcement actions, as appropriate. Regulators should consider the value of making enforcement actions public in order to protect customers and enhance market integrity.
18 IOSCO’s Efforts in Enhancing Regulation of Selling of Investment Products IOSCO to review the impact of social media and automated advice on the sale of financial productsAutomated AdviceAn interactive tool that either broadly or specifically produces recommendations for asset allocation, specific securities or trading strategiesIOSCO is assessing how intermediaries use automated tools to make or facilitate investment advice or recommendations to customers.Social MediaGiven that market intermediaries and investors are increasingly using social media websites for conducting business, we are seeking to understand how intermediaries have incorporated these newer modes of communication into their operations.Examples of social media websites: blogs, micro-blogs, Facebook, YouTube, LinkedIn and Twitter
19 Other International Regulatory Initiative UK FCA published a paper on behavioural economics exploring how people make financial decisionsMany products are inherently complexMany products involve trade-offs between the present and the futureDecisions may require assessing risk and uncertaintyDecisions can be emotionalSome products permit little learning from past mistakes
21 Major Challenges Ahead PeopleInvestors’ knowledge and behaviourInvestor may not be knowledgeable enough to make a rational investment decision. Rely on the specific and extensive expertise of financial plannersIssues relating to investor behaviourE.g. emotional, overconfidence and fear of loss of opportunitiesProfessional financial plannersMay respond to investor demand without realising that this is driven by investor biases *Expected to conduct business with high level of integrity and professionalism* References have been drawn from UK FCA’s occasional paper no. 1 – Applying behavioural economics at the FCA
22 Major Challenges Ahead ProductSpecific product regulationDisclosure of product information in a specific wayCertain products be sold only through particular channels (e.g. on the exchange) or to certain types of clients (e.g. professional investors) *Whether monetary incentives like gifts should be allowed for promoting investment products* References have been drawn from UK FCA’s occasional paper no. 1 – Applying behavioural economics at the FCA
23 Major Challenges Ahead PracticesPerceived conflicts of interestRecommendation of particular investment products to customers should not be determined purely by financial incentives receivedReview of sales culture to focus more on compliance, sales quality and customer satisfactionCommission based vs fee based structureBanning of provision of commission rebates by product providers to investment advisors in the UK and AustraliaWhether this will start a trend to change to fee-based transaction model or asset- based pricing modelEnsuring suitabilityCore of financial planningClient profiles now evolving rapidly. Need to be more interactive with clients and obtain more accurate and updated information from clientsTechnology changes the way financial planners interact with their customersUse new IT medium for promotion of investment productsUse automated advice tools