Global regulator concerned over financial product mis-selling

The International Organization of Securities Commissions (IOSCO), a global body representing financial regulators, has singled out misconduct in relation to retail financial products as one of its top four market risks for 2016.

The global financial watchdog said that in the retail financial markets, the mis-selling of complex investment products, such as unit linked insurance plans, was the most frequent problem causing the most harm to investors. 

Unit linked insurance plans are products offered by life companies such as Old Mutual International (formerly known as Royal Skandia), Friends Provident International, RL360 (formerly known as Royal London 360), Generali International, Zurich International, and Hansard International.

IOSCO also highlighted structured retail products as causing a lot of harm to investors, with one regulator, the UK’s Financial Conduct Authority (FCA), reporting that 46% of the advice on structured retail products was unsuitable. 

In its latest Securities Markets Risk Outlook for 2016, published on Wednesday, IOSCO said the complexity of investment products and services in general should be considered a risk area ripe for further investigation by regulators in terms of investor protection.

The annual risk outlook is based on IOSCO’s own data collection, surveys and analysis; along with market intelligence interviews in major financial centres and discussions with industry experts and regulators. A section in the latest report entitled “Harmful conduct in relation to retail financial products” was based on responses provided by regulators of 17 jurisdictions.

Suitability question 

“Respondents to the survey noted the risk of harmful conduct related to the mis-selling of products; a culture of greed evidence by excessive fees undermining the quality of retail financial products; and deficient disclosure of financial risks leading to investors making decisions on the basis of inaccurate information,” IOSCO said.

Among the 17 responding regulators, two regulators in particular reported unit-linked products as examples of harmful conduct: these were the Netherlands and the United Kingdom. Although IOSCO noted “unit-linked products are sold in many other jurisdictions, often by the same firms who offered these products in the Netherlands and the United Kingdom.”

Understanding needed 

IOSCO said the main problem was that investors did not fully understand the inherent complexity of the products they purchased, and with the products often designed to have opaque charging structures (in part to fund the large upfront commission paid to the ‘adviser’ or broker), many investors are unaware of the hidden redemption penalties, or simply how much they are paying in charges.

It identified the interplay of three main factors as causing this problem: “the daily changing prices of securities, which change the value of the investment fund; the changing cost of the insurance product because of the gender and age of the investor; and the interdependency of the cost of the insurance policy with the value of the fund.

“These factors have a complex, nonlinear mathematical relationship that is very difficult to understand, even for investors with good mathematical training,” it said.

“Another cause of the miss-selling of unit-linked products was that advisers did a poor job of explaining them to investors, compounded by the fact that the advisers themselves did not understand the complexity of the products.

“This was further aggravated by insufficient written information about the products. Further, the products attracted many investors because they promised very high yields (double-digit percentages) based on very short historical performance, which, in reality, could not be matched.”

“Lastly, the costs for these products and advisory services were high, with correspondingly high profit margin for firms and fees for advisers, so advisers “pushed” the sales of these products,” it said.

All legal 

IOSCO also noted that the unit-linked products highlighted by the Netherlands Authority for the Financial Markets and the UK’s FCA as being harmful for investors were for the most part not illegal at the time of sale: and the products and their sales channel (financial intermediaries) were only partly regulated during the period in which most of the sales of the products took place.

Besides unit-linked products, IOSCO said investors have run into unforeseen and substantive losses with other types of complex products.

Six regulators reported that structured retail products also caused considerable harm to investors. Other complex financial products that regulators reported as “mis-sold” were contracts for difference, complex products sold as bank deposits, derivative products, and unregulated collective investment schemes.


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