5 Reasons to Emphasize Suitability Now

As pandemic-related lockdowns end and the world gets back to business after a 16-month slowdown, those working in the financial sector should be ever more vigilant about the appropriateness of products they are promoting to prospects and clients. What that means: Don’t sell risky investments to retirees looking for economic stability. Don’t take advantage of a customer’s lack of knowledge of financial markets to sell an unsuitable product.

Let’s agree that the temptation to engage in mis-selling is there. After all, employees in the financial sector need to make up for lost income over the past year, and clients may be fairly flush, given the lack of recent spending, courtesy of a year spent at home. The signs of a strong bounceback are already here: Australia’s GDP has reached pre-pandemic levels, according to the Reserve Bank of Australia. And Hong Kong’s economy grew 7.9% in the first quarter of 2021. It can be easy to adopt a “sell, sell, sell!” mentality that disregards the far-reaching impacts of pushing inappropriate products on an unsuspecting population.

Managers, understandably, may be focused on other things as everyone strives to return to “normal.” But they—and their teams—need to emphasize suitability, perhaps now more than ever in recent years.

  1. The market needs preserving

If ever there was a time to consider the big-picture implications of what we do, the pandemic has certainly provided one. Now more than ever, the financial sector collectively needs to foster confidence and consumer trust to safeguard the financial system and, indeed, to help it grow. A mis-selling scandal is not what the system needs to bolster an investing public battered by life events.

  1. Enforcers are still enforcing despite the pandemic

Expect regulators to have learned and to remember lessons from the last economic meltdown. Challenging economic circumstances can compel otherwise capable people to make poor decisions. One need only consider Deutsche Bank’s $130 million settlement with the U.S. government announced earlier this year. The conduct that led to allegations of Foreign Corrupt Practices Act violations and commodities fraud began in the aftermath of the Great Recession. Pressure to get and keep clients can be high. With a Deutsche Bank veteran now chairing the Australian Securities and Investments Commission (ASIC), the regulated community might anticipate a bit more scrutiny.

  1. There’s a regulatory focus on mis-selling

Indeed, mis-selling and suitability seem to be on the collective minds of regulators throughout the APAC region. In June, the Korea Financial Services Commission introduced a guideline on suitability and appropriateness. Sellers need to conduct a suitability and appropriateness test for investors based on the information those customers provided. In that way, a seller can suggest appropriate products. The seller also needs to explain the reason for the test in understandable language.

Meanwhile, in China, the Banking and Insurance Regulatory Commission has issued new requirements on the sales of wealth management products to make sure they are not accompanied by any inflated or inaccurate claims. The effective date of the new measures is June 27.

  1. Wrongdoers may report misconduct to avoid prosecution

Moreover, wrongdoers themselves may be ever more inclined to step forward to report mis-selling courtesy of a relatively new immunity policy for market misconduct issued by ASIC earlier this year. People who report dishonest, misleading, or deceptive conduct involving financial products and services may be granted immunity from civil penalties and criminal prosecution provided, of course, that a few prerequisites are met.

Notably, they have to be the first person to disclose the misconduct to ASIC, and they have to report the inappropriate behavior before an ASIC investigation has begun. The individual disclosing the information must admit their own involvement and must not have persuaded others to become involved. They also have to cooperate with ASIC.

Despite these preconditions for immunity, the policy is still a powerful one. Other whistleblowers might step forward, too.

  1. Conduct risk exposure affects creditworthiness

Financial institution analysts at credit rating agencies are now weighing firms’ governance and risk management policies, litigation and potential fine exposures, and financial crime risks as part of their credit analyses, Thomson Reuters Regulatory Intelligence has reported. Not surprisingly, bad behavior—and even the potential to become involved in a controversy—counts against you.

Moving Forward

Individuals working in the financial sector need to avoid mis-selling, and managers and compliance departments need to be proactive about thwarting it as the world gets back to business. That could mean pushing out quick micro-learning refreshers on mis-selling and suitability requirements, incorporating reminders into internal daily messaging, or offering more thorough training on the topic.

Written by:

Thomson Reuters Regulatory Intelligence and Compliance Learning

Thomson Reuters Regulatory Intelligence and Compliance Learning on:

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