DERIVATIVES: IOSCO rules to avoid Lehman mini-bond fiasco

Better customer classification and disclosure is needed to ward off another Lehman mini-bond note fiasco, according to a new report from the Technical Committee of the International  Organisation of Securities Commissions.

The report follows formal investigations by regulatory authorities in Hong Kong and Singapore into allegations that the products were misrepresented to retail investors..

IOSCO noted that while the UK’s Financial Services Authority initiated a process in order to look at issues in the broader structured products market, the Lehman mini-bonds appear not to have been sold to the retail public in Japan and the US. The report observed that “additional losses may have been suffered by investors who had purchased similar structured products from banks and brokerage firms.”

To counteract those events from occurring again, IOSCO said several suitability requirements were needed with respect to the distribution of complex financial products. Intermediaries, it noted, should be required to adopt and apply appropriate policies and procedures to distinguish between retail and non-retail customers. Customers should also have protection from non-advisory services, it added.

In addition, it noted that “intermediaries should be required to develop and apply proper policies that seek to eliminate any incentives for staff to recommend unsuitable complex financial products.”

Enforcement was another key recommendation. Regulators and self-regulatory organisations 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” IOSCO said.  

The technical committee also supports the concept of having business conduct rules as cited by the G20.

Comments on IOSCO’s suitability requirements are requested until May 21, 2012.