The asymmetry around complexity and risk continues to bring uncertainty to the industry and the market concluded a panel of global regulators at last week’s 12th Annual StructuredRetailProducts.com Conference held in London. “The industry doesn’t like uncertainty,” said Tim Hailes (pictured), chairman of the Joint Associations Committee (JAC) on retail structured products. “Regulators have not been able to establish if investors need to know how a product works or just how the risk-regard equation works.”
Product providers need to establish that there’s a need for a particular product before it is brought to market, said Barbara Antonides, senior supervision officer, efficient capital markets at the Dutch AFM. “If the perception of the investor does not match what the product does, then there’s an issue of suitability,” she said.
Despite the challenges, it is important to keep the dialogue open to move the process forward and improve the market, said Werner BijKerk, head of research at the International Organisation of Securities Commissions (Iosco). “Whether it is through disclosure and suitability tests, providers need to issue products that are suitable, right and efficient,” said BijKerk. “There are challenges to reconcile one single standard for the global market but we have seen significant efforts across jurisdictions.”
Assessing suitability requires a view of the entire value chain, said Wolf Von Kopp-Colomb, head of section, securities supervision, asset management at Bafin, Germany’s financial regulator. “Manufacturers need to be aware of what distributors are doing with their products,” said Von Kopp-Colomb. “We have detected products that are not appropriate for anyone and these should not have reached the market. Distributors also need to be aware of what they’re selling.”
Esma’s 2013 report on "retailisation" concluded that investors don’t understand the risk-return dynamics of these products, said Patrick Armstrong, senior officer, financial innovation at the European Securities and Markets Authority (Esma). “Priips and Mifid 2 will bring a robust product governance framework in place and we expect manufacturers can now make sure that only suitable products are sold to retail investors,” said Armstrong. “Transparency and cost will remain at the top of Esma’s scrutiny to make sure they’re not overlooked; while training and supervision of the distribution process will also be monitored.”
Armstrong said that Esma has had a bias in favour of wrappers that require strong governance supervision but that no particular wrapper has been singled out on the basis of suitability, to which Hailes responded that the industry position is that the final policy is sensitive across wrappers.
“Delivery mechanisms are used for different purposes,” said Hailes. “Comparability is good as long as you compare the same things.”
Von Kopp-Colomb pointed to the dangers of loading retail investors with unnecessary information and the difficulty of reading prospectuses, even for qualified lawyers. “Base prospectuses are complex and difficult to read,” he said. “We are in talks with lawyers to assess the understandability of prospectuses and the legal terminology.”
Von Kopp-Colomb also said that although in Europe the industry tends to see directives as compartmented blocks, “we should look at them as intertwined guidelines”.
However, Antonides pointed out that research has found that investors do not read prospectuses before making an investment decision. “Prospectuses are not the primary source retail investors use [before investing], but marketing materials,” she said. “Investors are focused on risk, expected returns, guarantees/protection and the duration of the product. Providers need to make available the full outcome scenarios in their product marketing.”
The panel concluded that despite efforts from Iosco to provide a harmonised set of rules, the lack of international treaties and political commitment would make difficult to implement a common global framework. “Perhaps it would be better to focus on setting up a set of harmonised objectives rather than a harmonised set of rules,” said Peter Maas, principal risk specialist, prudential supervision and specialist department, supervision at the UK Financial Conduct Authority (FCA).