Monday, December 23, 2013

IOSCO Releases Regulatory "Toolkit" for Retail Structured Products

On December 30, 2013,  the International Organization of Securities Commissions (IOSCO)  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 was developed in response to to concerns from IOSCO members about the regulatory challenges these products pose, especially investor protection.  In the aftermath of the Lehman bankruptcy, a number of regulatory approaches have been proposed to end irresponsible selling practices, rebuild investor confidence, improve overall transparency, and simplify unnecessary complexity.  The different approaches taken by regulators in different jurisdictions have been widely divergent, however.  In an effort to instill some global consistency in the regulation of retail structured products, IOSCO has developed this toolkit outlining a menu of regulatory options that IOSCO members could consider as they draft rules governing these products in their jurisdictions.

The final report is a product of IOSCO’s Task Force on Unregulated Markets and Products, which  established a Working Group on Retail Structured Products, consisting of (amongst others) the Financial Services Authority (“FSA”) in the UK, the Securities and Exchange Commission (“SEC”) in the United States and the Financial Services Agency in Japan. A draft consultation paper was issued in April of 2013 seeking comment on the toolkit's proposals.

The final regulatory toolkit breaks down into five primary areas with 15 regulatory tools that are organized along the value chain of the retail structured product market, from issuance to distribution to investment:
  • suggested overall regulatory approach to retail structured products (the “value-chain” approach); 
  • product design and issuance; 
  • product disclosure and marketing; 
  • product distribution; and 
  • post-sales practices.

The report's authors stress that the toolkit's findings are merely recommendations, and all of the recommendations may not be suitable in every instance.  According to the report:

The Toolkit has been developed with the goal of enhancing investor protection by providing regulators with possible approaches that may help 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. 
 . . .
Regulators may conclude that the relevance of specific tools in their jurisdictions may vary according to the characteristics of their specific regulatory framework, the characteristics of the issuing entity, the characteristics of the product involved, or other factors. Regulators may therefore wish to incorporate these tools on a selective basis or in a manner best suited to their circumstances and national legal frameworks.