On September 26, 2019, the International Organization of Securities Commissions (IOSCO) released its report (the "Report") setting out the findings of its review on the consistency of implementation by 29 IOSCO members in 28 jurisdictions of the nine suitability principles (the "Principles") aimed at preventing the mis-selling of complex financial products under IOSCO's Suitability Requirements With Respect to the Distribution of Complex Financial Products report, which was published in 2013 (the "2013 Report").

For purposes of the review, "complex financial products" refers to financial products with terms, features and risks that are not reasonably likely to be understood by a retail customer because of their complex structure, and which may be difficult to value.

Section 4 of the Report includes a table providing IOSCO's ratings for each participating jurisdiction with respect to their consistency of implementation of the Principles. Although only five jurisdictions earned ratings of "Fully Consistent" across all nine Principles, IOSCO determined that the majority of the jurisdictions implemented the Principles in manners generally consistent with the Principles.

Other key findings and observations in the Report include:

  • 19 out of 28 jurisdictions require intermediaries to distinguish between complex and non-complex products, including by defining the products and product attributes that are complex, defining specific products that are non-complex, and providing guidance on product complexity in lieu of codified standards. Definitions used by developing jurisdictions varied the most from the 2013 Report, which IOSCO posited may be a reflection of the current state of market development and investor sophistication in those jurisdictions. Definitions of complexity appear to correlate to levels of market development, which, in turn, appear to correlate to robustness of suitability frameworks in those jurisdictions.
  • The majority of jurisdictions were either "fully consistent" or "broadly consistent" in implementing the Principles to distinguish retail customers from non-retail based on their ability to understand the risks associated with financial products and to make independent investment decisions, and in implementing an overarching duty of care with respect to intermediaries' conduct towards customers. However, the practices of most jurisdictions did not consider the complexity and riskiness of different products, which is inherent to the Principles.
  • All but two of the jurisdictions have specific product disclosure regimes prescribing the basic level of disclosure needed for customers to make an informed decision regarding a financial product, such as the features, risks and costs (rather than just merely providing access to such information).
  • Jurisdictions operating under European regimes and complying with the Markets In Financial Instruments Directive ("MiFID II") especially had strong approaches to compliance and suitability assessments in line with certain Principles.
  • FinTech development with respect to digital advisors and online platforms has created new suitability-related challenges.

The full report is available here.

Originally published in REVERSEinquiries: Volume 2, Issue 10.
Click here to read the articles in this latest edition.

Originally published November 05 2019

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2019. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.