Customer Suitability in the Retail Sale of Financial Products and Services

Basel Committee on Banking Supervision The Joint Forum Customer suitability in the retail sale of financial products and services April 2008 Requests for copies of publications, or for additions/changes to the mailing list, should be sent to: Bank for International Settlements Press & Communications CH-4002 Basel, Switzerland E-mail: publications@bis.org Fax: +41 61 280 9100 and +41 61 280 8100 © Bank for International Settlements 2008. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN print: 92-9131-763-2 ISBN web: 92-9197-763-2 THE JOINT FORUM BASEL COMMITTEE ON BANKING SUPERVISION INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS C/O BANK FOR INTERNATIONAL SETTLEMENTS CH-4002 BASEL, SWITZERLAND Customer suitability in the retail sale of financial products and services April 2008 Table of Contents 1. Executive Summary ...................................................................................................... 1 2. Introduction ................................................................................................................... 4 Impetus for consideration of the issue ............................................................................. 5 The risks around inappropriate sales .............................................................................. 5 Potential mitigation .......................................................................................................... 6 The present report ........................................................................................................... 6 3. Regulatory requirements .............................................................................................. 8 A. Role of the regulatory authority ............................................................................ 10 1. Sector coverage of the authorities in charge of suitability requirements ..... 10 2. Enforcement actions ................................................................................... 10 B. Description of suitability requirements ................................................................. 11 1. Definition of retail customer ........................................................................ 11 2. The suitability determination ....................................................................... 11 3. Disclosure requirements concerning financial products .............................. 15 4. Suitability obligations with regard to specific products ................................ 16 5. Sales programmes requirements ................................................................ 17 C. Supervisory monitoring and specific actions ........................................................ 18 1. Inspections .................................................................................................. 18 2. Imposition of sanctions for non-compliance with disclosure, customer communications, or suitability requirements ............................................... 18 3. Imposition of sanctions for failure to supervise compliance by an agent or third party related to disclosure, customer communications, or suitability requirements ............................................................................................... 19 D. Customer redress: private courses of action and/or arbitration ........................... 20 E. Regulatory requirements on risk management processes ................................... 20 1. Responsibilities imposed upon firm management to monitor compliance .. 20 2. Requirements to train employees ............................................................... 21 3. Regulatory requirements for the registration or licensing of individuals employed by a regulated financial firm ....................................................... 21 4. Product design ............................................................................................ 22 5. Designation of an officer/unit in charge of compliance ............................... 23 6. Evaluation of risks posed by mis-selling ..................................................... 23 7. Specific requirements with regard to the handling of customer complaints 24 8. Heightened supervision of employees that have engaged in misconduct .. 24 9. Firm communication with clients/advertisements ........................................ 25 F. Other .................................................................................................................... 25 1. Customer education requirements or authority programmes ..................... 25 2. Non-regulated products .............................................................................. 26 3. New regulatory initiatives relevant to suitability determinations ...