The Joint Forum released a paper today examining the issue of suitability in retail investment products. It found that the insurance industry generally has less rigourous policies than the securities and banking sectors. And, it said, the industry needs to improve compensation practices.

The report looks at how regulators and firms in the banking, securities and insurance sectors deal with risks posed by the sale of unsuitable retail financial products. The Joint Forum reviewed both the disclosure of information to retail investors and requirements on firms to determine whether recommended investment products are suitable.

It found that the notion of suitability is recognized in regulatory requirements across all sectors, but to a varying extent. And, a consistent suitability regime that applies across all three sectors is more likely in countries that have an integrated regulator across the sectors, it found.

In general, suitability requirements are more specific and enforcement remedies are more likely to be specifically prescribed by securities regulators, it observed. And, it noted that disclosure requirements for conflicts of interest are generally less rigorous for insurance industry products than for other products.

As for the firms themselves, the research concluded that investment firms, asset managers and banks apply robust suitability policies. “Recommendations made to their customers are based on the quasi systematic collection of core information on the financial condition, objectives and risk tolerance of their customers,” it said.

However, it noted that insurance companies “generally have a less comprehensive suitability policy, sometimes as a result of less detailed requirements: they collect on average less information before making a recommendation, and fewer than half of the companies surveyed keep a record of recommendations made.”

The compliance framework appeared also to be less rigorous in several insurance companies, it said. “The investment products offered by insurance companies are less frequently the most risky types of investment products, and some companies noted that for most products sold, the nominal value of the initial investment was guaranteed. They nevertheless raise similar suitability issues,” it noted.

In many jurisdictions, firms generally appear to provide useful information to the customer prior to a sale, particularly with respect to product features and direct costs, the paper found. “However, only 60% of firms consistently provided information on conflicts of interest and remuneration. There was wide disparity even in this figure, with only 40% of insurers saying they provide such information,” it said.

“When looking at the range of information provided to investors when making a sale or recommendation, customers were more likely to be asked by the insurance sector to acknowledge that they had received and understood the information provided. However the range of information provided to customers was generally more limited in the insurance sector,” it said, adding that, in some cases, this would be a result of the type of product.

“A more encouraging finding was the training that firms provide to sales agents and advisors. Almost all firms include compliance training as part of the overall training programme. Many firms appear to test their employees’ understanding of regulatory and firm policy requirements. However, in looking at remuneration arrangements for agents and advisors, only 60% of firms take compliance issues into account in paying remuneration,” it discovered.

The report concluded that suitability will continue to be an important issue, as more investors are forced to take responsibility for their own finances, “there seems no reason for the rules governing its sale to differ substantially, simply based on whether it is sold in the banking, insurance or securities sector.”

Additionally, the Joint Forum noted that a “number of regulators expressed concern about a wide range of ‘financial products’ which fall outside of their regulatory jurisdiction, but which displayed similar functionality and characteristics to regulated products.”

Finally, it advised that, “regulators and firms across all sectors could improve rules and practices regarding how sales agents are remunerated.”

“Innovation in the financial services industry has brought enormous benefits for consumers, but it also raises the prospect that some individual investors may buy products that are not suitable for them,” said John Dugan, chairman of the Joint Forum and Comptroller of the Currency in the US. “As regulators, our concern is to make sure that investors are properly protected, and that the institutions we supervise don’t suffer damage to their reputation. This report will help greatly in that regard.”