- The Australia Financial Markets Association has
compiled retail structured product approval principles to
give comfort to retail investors wary of the products after
the global financial crisis;
- While most international principles focus on how
financial advisors should advise retail investors,
Afmas focus on the issuers process in approving
the issue of these structured products;
- Other jurisdictions may look to the principles to
establish international best practice related to the issue of
retail structured products.
Retail structured products have been stigmatised following
the global financial crisis. But the Australia Financial
Markets Association's (Afma's)
principles for retail structured financial product approval
present an example for best practice across the
Although the Australian Securities and Investments
Commission (Asic) released both a
regulatory guide and a
report, it ultimately left the creation of principles
related to retail structured financial product approval to
In comparison with Australias more muted reaction,
some Asian jurisdictions cracked down on retail structured
products after the global financial crisis. Hong Kong has been
especially cautious following the complex recovery of
collateral from Lehman Brothers mini-bonds.
Afma executive chairman David Lynch said that investor risk
appetite for structured products has not been particularly
strong since the global financial crisis, although a recovery
in share market prices in the last few months may help build
He added that the principles should help the market to grow
in this environment by helping to underpin the quality of
structured products being offered to the investors.
Why the principles were created
Tracey Lyons, Afmas director of market operations and
retail, told IFLR that Asic suggested the product
approval principles as a thought leadership piece.
She noted that Asic had done some work in terms of looking
at the processes issuers were following when creating new
products and how they were deciding how they would be
distributed. However, she added that a lot of this work was
done before the global financial crisis, when these products
were more popular than at this point in time.
Asic suggested that this would demonstrate some
initiative within the industry to help in the process of
restoring investor confidence, she said.
King & Wood Mallesons Jim Boynton, who was on the
Afma working group that developed the product approval
principles, agreed that they are important to the future of the
market. He said that although the regulators made a submission
to a parliamentary enquiry, the government did not ban those
Despite this, the regulator is watching what happens
with these products, he commented. If there is a
problem going forward, the regulator might want to revisit this
Afmas principles were largely guided by similar
guidelines in Europe, such as the UK Financial Services
Authoritys March 2012
Retail Product Development and Governance Structured
Product Review, and the Technical Committee of the
International Organisation of Securities Commissions s
Suitability requirements with respect to the Distribution of
Complex Financial Products.
Other documents cited by Afma include those by the European
Securitisation Forum, the International Capital Market
Association (ICMA), International Swaps and Derivatives
Association (Isda), the London Investment Banking Association
and the Securities Industry and Financial Markets Association
But Afmas principles also address some aspects
specific to Australias retail structured product
Lyons noted that they focused on the process that an issuer
would follow to develop these products, which differs from
other international guidelines.
We looked at the process that considered whether these
products are appropriate to be distributed to retail customers
as well as the critical issues that should be considered for
the distribution mechanism, she said.
Although most international guidelines - such as
Ioscos - focus on how intermediaries should classify and
advise their customers, these product approval principles
dont address financial advisors.
Lyons explained that the principles do not address how an
advisor should advise a retail customer about structured
products because Australian law has quite specific requirements
in this area. She added that Afma did not see a need to further
clarify those obligations.
Instead Afmas principles place a strong emphasis on
internal controls, promoting a product approval policy that
provides disclosure, manages risks and considers the
suitability of target investors. Aside from legal and
compliance risk, the principles address consideration of
reputational risks and include a list of units that should be
involved in product sign-off.
It also recommends that issuers address investor
considerations regarding a products complexity, such as
how to exit the product and how the product operates.
But the report also notes that this is not the issuers
regulatory responsibility. Boynton said that in Europe, there
are tests on whether a product is suitable or appropriate. In
Australia, however, the statutory tests apply only where a
financial advisor advises retail.
There is no statutory obligation on the product issuer
to ensure that the product is sold via appropriate distribution
channels so that only informed investors buy these
products, he said.
Regardless most significant institutions already have
similar measures in place.
It was certainly apparent throughout the course of
developing the principles that some entities meet these
principles and in some cases go well beyond them, she said.
She added, were quite confident that a number of
Afma members have processes that go beyond these
It seems that the jurisdictions that tightened regulations
on retail structured products are beginning to reopen.
Although only accredited investors can participate in the
options market in Hong Kong, the Hong Kong Exchange (HKEx)
announced its stock options market revamp on March 20. The
initiative includes a Stock
Options Corner on the HKEx website and a Facebook game with
prizes such as iPods to encourage retail investors to learn
more about stock options.
These principles may encourage industry associations and
regulators elsewhere to establish similar regimes.
But Boynton was sceptical. He said that whether these
product approval principles will be replicated elsewhere in
APAC depends on what products can be offered in those countries
and what restrictions are already in place.
Hong Kong has already implemented special rules for complex
retail products so I doubt whether the principles will be taken
up there, he added.
However Afma has begun looking internationally. Lyons said,
what were thinking about is how we can share the
principles with colleagues in other jurisdictions.
She said that the Asic chairman, who is the incoming chair
of Iosco, has a particular interest in this area and has been
talking about the product approval principles internationally,
so we think that theres a growing awareness of the work
thats been done in Australia.
We hope the principles form part of the information
thats available to other countries that may be looking at
these issues, she commented.
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