Regulation of Selling of Investment

Products
24 April 2013

Stephen Po
Senior Director, Intermediaries Supervision, Hong Kong Securities and
Futures Commission
Chairman, IOSCO Standing Committee on Regulation of Market
Intermediaries
Outline

 Growth opportunity of financial planning industry

 IOSCO’s efforts in enhancing regulation of selling of investment
products
 Major challenges ahead in selling of investment products
 Regulatory partnership with professional industry

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Growth Opportunity of Financial Planning
Industry
 Wealth accumulation worldwide
– Capgemini and RBC Wealth Management World Wealth Report
 Population of high net worth individuals (“HNWIs”) increased to 11 million in 2011
and overall wealth amounted to US$42 trillion
 HNWIs mean those individuals with US$1 million or more at their disposal for
investment

No. of HNWIs in 2011 Wealth

Asia Pacific 3.37 million US$10.7 trillion

North America 3.35 million US$11.4 trillion

Europe 3.2 million US$10.1 trillion

 Wealth management/ financial advisory is a growth business

– Pool of wealth is growing and the need for capital preservation is great
– Investors are demanding yield enhancement under low interest rate
environment

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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 making
 6 principles on Key Information:
1. Disclose to investors fundamental benefits, risks, terms and costs of the
product and intermediary remuneration and conflicts.
2. Provide such information to investors for free before the point of sale to
help them make an informed decision about whether to invest.
3. Deliver or make the information available in a manner that is appropriate
for the target investor.
4. Should be in plain language and in a simple, accessible and comparable
format to facilitate a meaningful comparison with competing products.
5. Should be clear, accurate and not misleading to the target investor.
Disclosures should be updated on a regular basis.
6. When making rules for intermediaries and product producers, regulators
should consider who has control over the information to be disclosed.

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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
intermediaries
 The 9 principles cover the following areas:
– Classification of customers
1. Intermediaries 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.

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IOSCO’s Efforts in Enhancing Regulation of
Selling of Investment Products
– General duties irrespective of customer classification
2. Intermediaries 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 requirements
3. Customers 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 services
4. When 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.

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IOSCO’s Efforts in Enhancing Regulation of
Selling of Investment Products
– Suitability protections for advisory services (including portfolio management)
5. 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.
6. 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 procedures
7. Intermediaries 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.

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IOSCO’s Efforts in Enhancing Regulation of
Selling of Investment Products
– Incentives
8. Intermediaries should be required to develop and apply appropriate
incentive policies designed to ensure that only suitable complex
financial products are recommended to customers.
– Enforcement
9. Regulators 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. 

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Would the Regulation of Selling of Investment
Products Stop Here?

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Peop

Product

Practices

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Major Challenges Ahead in Selling of
Investment Products
People
 Investors’ knowledge and behaviour
– Investor may not be knowledgeable enough to make a rational investment
decision. Rely on the specific and extensive expertise of financial planners
– Issues relating to investor behaviour
 E.g. emotional, overconfidence and fear of loss of opportunities

 Professional financial planners

– May 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

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Major Challenges Ahead in Selling of
Investment Products
Product
 Specific product regulation
– Disclosure of product information in a specific way
– Certain 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

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Major Challenges Ahead in Selling of
Investment Products
Practices
 Perceived conflicts of interest
– Recommendation of particular investment products to customers should not be
determined purely by financial incentives received
– Review of sales culture to focus more on compliance, sales quality and customer
satisfaction
 Commission based vs fee based structure
– Banning of provision of commission rebates by product providers to investment
advisors in the UK and Australia
– Whether this will start a trend to change to fee-based transaction model or asset-
based pricing model
 Ensuring suitability
– Core of financial planning
– Client profiles now evolving rapidly. Need to be more interactive with clients and
obtain more accurate and updated information from clients
 Technology changes the way financial planners interact with their customers
– Use new IT medium for promotion of investment products
– Use automated advice tools
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Regulatory Partnership with Professional
Industry Bodies
 Financial planners have an important role to play
– To help their clients better understand their own situation and the
recommended products and facilitate them to make investment decisions to
improve their net worth
 While international standard setters are developing principles on selling
practices, professional industry bodies can help by -
– Establishing and enforcing industry standards of professional practice
– Providing ongoing training and guidance to members
– Maintaining continuous dialogue with regulators and provide input on
development of regulatory measures

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