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The International Organization of Securities Commissions (IOSCO) today published the final report on Regulation of Retail Structured Products, which provides a toolkit outlining regulatory options that securities regulators may find useful to regulate retail structured products.
The Toolkit has been developed with the goal of enhancing investor protection by providing securities regulators with possible approaches to address certain concerns with retail structured products. The proposed tools are intended to allow for a wide range of application and adaptation in different jurisdictions, and regulators may choose to implement some, all, or none of them in their jurisdiction.
Securities regulators may find the Toolkit useful because of the growing popularity of complex financial tools among retail investors. These products combine derivatives with other financial instruments. Retail investors might lose money through not understanding the products' complexity. Several events, including the 2008 default on products relating to the Lehman Brothers failure, exposed the problems retail investors can face with structured products. These events raised concern among IOSCO members about investors understanding of the products, design, disclosure, suitability, mis-selling and post-sale product controls.
The Toolkit has five sections with 15 regulatory tools that are organised along the value chain of the retail structured product market, from issuance to distribution to investment. They cover:
- A potential regulatory approach to retail structured products;
- Potential regulation of the product design and issuance;
- Potential regulation of product disclosure and marketing;
- Potential regulation of the product distribution; and
- Potential regulation of post-sales practices (once investors have the products).
Edouard Vieillefond, Managing Director of the French Autorité des Marchés Financier, co-led the task force that produced the report, together with Greg Medcraft, Chair of the IOSCO Board and Chairman of the Australian Securities and Investments Commission.
Mr Vieillefond said: Because it encourages the emergence of a more secured environment along the value chain of the retail structured product market, this Toolkit works as a strong incentive for the industry to develop understandable innovative products to fulfil investors’ needs.
He said: In this way, this toolkit creates better conditions for financial innovation to suitably progress.
Background
In February 2012, IOSCO agreed to work on retail structured products, in order:
- to understand and analyse the market, and related regulatory issues; and
- to develop guidance, if appropriate, on regulatory responses.
In mid-2012, IOSCO conducted a survey among its members. It asked for details of the retail structured product market in their jurisdiction, their regulation of retail structured products, and the regulatory challenges they observed.
IOSCO members were also asked to comment on the best-practice regulatory approaches for dealing with the challenges observed in the market. Twenty six IOSCO members responded to the survey.
These Survey results were supplemented with feedback from attendees of a Round Table held in London in November 2012 and Working Group members. In April 2013, IOSCO published a Consultation Report asking for input from interested parties on the Survey results and the Toolkit.
The report provides an overview of structured products and gives recent examples of regulatory and policy action concerning retail structured products across jurisdictions.
