612 SALES AND MARKETING GUIDELINES FOR FINANCIAL PRODUCTS1
a. Financial products – refer to debt and equity securities, hybrid securities, derivatives as defined under Sec. 613, securitization structures, and similar products with substantial investment characteristics.
b. Broker – a person engaged in the business of buying and selling securities for the account of others.
c. Dealer – a person who buys and sells securities for own account in the ordinary course of business.
d. Complex products – refer to financial products whose terms, features and risks are not reasonably likely to be understood by a non-sophisticated client because of their complex structure, and which are also difficult to value, particularly when there is a very limited or no secondary market.
a. Client Information
(1) Investment amount/ investible funds or amount of exposure to be hedged;
(2) Financial situation – the client’s financial standing, which includes information on assets, net worth, financial commitments, regular income, and capacity to withstand losses arising from financial transactions;
(3) Knowledge of financial products – the client’s knowledge and understanding of the financial markets and products and the risks involved therein;
(4) Investment/hedging experience – the nature of investments and/or derivatives transactions undertaken by the client, including the length of time, frequency of dealings, and the extent to which he/it has relied on the advice of a bank or a financial advisor, if any;
(5) Financial objectives – the client’s goal or purpose for entering into a transaction, whether it be for regular income, capital appreciation, capital preservation, maintenance of purchasing power, hedging as against investment, and/ or long-term buy and hold as opposed to short-term active trading;
(6) Risk appetite – the level of risk a client is willing to take;
(7) Holding period or investment horizon – the length of time over which the position or exposure to be hedged will be held by the client;
(8) Regulatory and legal constraints – prohibitions or limitations imposed on the activity of the client by existing laws, rules, and regulations, and;
(9) Liquidity needs – the client’s need to convert positions into cash and the timing of such requirement.
b. Client Classification
(1) Market counterparty – refers to any financial institution, only with respect to the instruments in which it is authorized to engage as a broker dealer;
(2) Sophisticated institutional client – refers to an institution that is not a market counterparty but has the level of net worth, knowledge, expertise, and experience to deal with financial products;
(3) Sophisticated individual client – refers to an individual who has demonstrated to the BSFI that he has the level of net worth, knowledge and experience to deal with financial products; or
(4) Other clients – refer to all other institutional or individual clients not categorized as market counterparty, sophisticated institutional client or sophisticated individual client.
(1) Conservative – Client prefers an investment and/or hedging strategy where the primary goal is to prevent the loss of principal;
(2) Moderate – Client is willing and able to expose funds to a moderate level of risk in consideration for higher returns or to meet certain objectives; and
(3) Aggressive – Client is willing and able to accept higher risks involving volatility of returns and even possible loss of investment in return for potentially higher long-term results.
c. Suitability Review
(1) Suitable to the client’s needs, financial situation, and objectives;
(2) Consistent with the client’s mandate, risk tolerance, and constraints; and
(3) Aligned with the client’s knowledge and experience, such that he/it understands the nature of and risks associated with the product.
(1) The BSFI has informed the client of the protections he/it may lose and conversely, of the risks that he/it is exposed to,
(2) The client still wishes to proceed with the transaction despite the BSFI’s assessment, and
(3) The client fully understands and is willing to take the risks attendant to the product to be availed of.
a. Financial promotion (marketing and sales)
A BSFI embarking on a financial promotion, whether through a direct offer or information/sales publications, shall ensure that it gives sufficient information on the entire transaction, including the underlying financial instruments, if any, to enable a client to make an informed decision. A BSFI shall prominently indicate its name in all its promotional materials and specify its role or capacity in the transaction (e.g., issuer, dealer, broker).
A financial promotion is considered clear, fair and not misleading if all of the following requisites are present:
(1) The information provided does not only emphasize the potential benefits of the product but also presents a fair and prominent description of the relevant risks and assumptions;
(2) It draws the customer’s attention to the warnings, exclusions and disclaimers in all documents relating to the financial product;
(3) The design, content or format of the presentation does not disguise, obscure or diminish the significance of any statement, warning or other matters that the customer should be aware of;
(4) A client, by himself, can discern from the presentation whether a statement is a fact, promise or forecast;
(5) The accuracy of all material statements of fact can be substantiated;
(6) Any comparison or contrast of a product offered is made with another product that is intended to meet the same needs or to serve the same purpose. The comparison or contrast shall include all relevant factors. The facts presented shall be verifiable; alternatively, the relevant assumptions shall be disclosed;
(7) No reference to an approval by a regulatory body or its officials is made, unless a written approval was actually obtained;
(8) A recommendation to consult/refer to a financial advisor is made; and
(9) It does not omit any information, the omission of which causes a material fact to be misleading, unclear, or unfair.
b. Product disclosures
(1) When the product’s past performance is used to illustrate possible future returns, the disclosure shall state that past performance is not necessarily indicative of future performance. This shall be presented in the main text of the presentation material. Past performance shall be culled from a reasonable time frame to provide a fair and balanced indication of a product’s performance;
(2) When using any forecast on the economy or financial markets, the disclosure shall state that such forecast is not necessarily indicative of the future performance of the product; and
(3) Illustrations of returns shall include worst-case scenarios (i.e., not just the likely or best scenarios). Benefits shown in headline rates (pro-forma returns highlighted) should be realistic and achievable, and not based on unreasonably optimistic views of events.
c. Minimum required disclosures
Product-specific minimum disclosures shall include:
(1) The nature of the financial product, including the underlying financial instruments, and how these products work;
(2) Investment horizon or tenor of the financial product;
(3) Fees and charges, if any;
(4) Details on the issuing entity in case the dealing BSFI is not the issuing institution (i.e., the BSFI acts as a broker/dealer or market maker);
(5) Returns or benefits likely to be derived from the instrument, the amount and timing thereof and whether the benefits are guaranteed or not;
(6) All risk factors that may result in the client receiving returns less than the illustrated returns and factors affecting the recoverable amount by the client;
(7) Details of conflicts of interest, if any;
(8) Information on the handling of complaints related to the product;
(9) All termination clauses, when appropriate, including charges and restrictions;
(10) Any warning, exclusion or disclaimer in relation to the risk and rewards of the product, including, but not limited, to the following:
(a) The product carries higher risks than those associated with ordinary bank savings or time deposits;
(b) The product is risky and may not be appropriate if the client is not willing and able to accept the risk of adverse movements in the underlying securities or reference rates;
(c) Past performance of the product is not a guarantee of its future performance;
(11) Other disclosures that may be required by existing laws, rules and regulations.
Where applicable, a BSFI shall draw the attention of the client to the following:
(1) The effect of early redemption of a product on the return (e.g., penalties and/or a poor returns);
(2) The availability of maximum benefit advertised after a specified period; and
(3) The required conditions for the advertised growth rate of income to materialize.
Complex products should carry a standard warning that they are not suitable for all clients, and are intended for experienced and sophisticated clients. They should likewise carry appropriate warnings on the high economic risks of the transaction, such as:
(1) Loss of all or a substantial portion of the investment due to leveraging or other sophisticated practices;
(2) Mismatch between the change in the price of a hedge versus the change in the price of the exposure it hedges;
(3) Volatility of returns;
(4) Lack of liquidity considering that there may be no secondary market for the instrument;
(5) Restrictions on transferring interests; and
(6) Absence of information regarding valuation and pricing.
- BSFIs shall be given three (3) months from 28 November 2015 to make appropriate changes in their sales and marketing policies, processes and materials in order to comply with the requirements of this Section.
- The BSFI is expected to have an internal policy for the identification of reputable credit rating agencies and prudent use of external credit assessment.
- Leverage or gearing can be employed in a structured product in order to offer higher yields.
- BSFIs should refer to existing Guidelines on Operational Risk Management.