Central bank-supervised financial institutions have been ordered to pay more attention to client suitability, with authorities issuing new rules aimed at strengthening consumer protection and industry safeguards.
The Bangko Sentral ng Pilipinas (BSP) on Tuesday said its policy-making Monetary Board has endorsed the issuance of regulations governing the sales and marketing of financial products, adding that covered institutions have three months to comply.
“They have to have policies and procedures in place for the marketing of financial products, particularly on the specifications of information that would have to be gathered for client suitability,” central bank Governor Amando Tetangco Jr., told reporters.
The new regulations build on existing guidelines for derivatives by extending their coverage to a wider spectrum of instruments, including debt and equity securities, hybrid securities, and similar products with investment characteristics.
Given an increasing focus on financial products as a business line and also the rising complexity of such product offerings, the central bank said risks for both clients and BSP-supervised financial institutions (BSFIs) had increased.
“The proper conduct of client suitability is, therefore, deemed a crucial part not only of consumer protection but also of the self-protection of supervised entities against adverse claims,” it said in a statement.
Last month, the central bank tightened regulations governing the treasury activities of BSFIs.
Under the new financial product rules, BSFIs will have to classify clients based on their risk tolerance and also sophistication, and the rules also set out the suite of products that may be offered to conservative clients.
It defines the use of waivers, noting that clients should not be made to “automatically and comprehensively waive the outcome of the client classification process and the resulting protections even before a product is recommended.
Compensation and incentives for sales personnel also need to be regularly reviewed to ensure that these are designed in a way that will prevent conflicts of interest.
“They should show the risk profile of the client as well as disclosure requirements.There is also greater emphasis on disclosure requirements for financial products marketed by the banks through their treasury departments,” Tetangco said.
The BSP said: “BSFIs will have three months from the effectivity of the circular to make appropriate changes in their sales and marketing policies, processes and materials to be able to comply with the new regulations.”
It noted that the guidelines aim to emphasize governance among supervised institutions in ensuring that they comply with their own policies and procedures and relevant laws covering sales and marketing activities.
The sales and marketing practices of trust departments and those related to BSFIs’ cross-selling activities, however, are not covered by the new regulations.
“The existing frameworks for these activities shall continue to apply,” the central bank said.