Complex Financial Products: IOSCO Suitability Requirements

The Technical Committee of the International Organization of Securities Commissions (IOSCO) published a Consultation Report on 21 February 2012 on suitability requirements for the distribution of complex financial products.1 IOSCO’s intent is to propose minimum principles to be observed by intermediaries in assessing the suitability of structured investment products for their customers, so as to reduce the risk of mis-selling.

From a survey of its members, IOSCO has concluded that most jurisdictions already have developed requirements relating to determining suitability of investment products generally, but the focus of this Consultation Report is specifically on complex financial products (as defined below). Despite the complexity of a product not necessarily bearing any relation to its riskiness, IOSCO considers that the complexity of a financial product will typically affect how easy it is for the investor to understand the risk/reward profile associated with the product. The Report therefore proposes nine principles to ensure robust investor protection in respect of the distribution of complex financial products to both retail and non-retail investors. Distribution in this sense is given a broad meaning and includes not only the sale of such products, but also investment advice and recommendations, as well as the exercise of investment management discretion which results in investors holding such products.