The principles stipulate that retail distribution should take place through intermediaries and never a direct from a product provider. This includes creating a firm distinction between the provider and distributor, even if they are both owned by the same holding entity. Product providers should also consider what internal processes are appropriate for retail structured products.
When distributors deal directly with clients, the trade bodies recommend that suitability falls squarely with the distributor “as it is considered in the context of confidential information provided by the client to the distributor”. Distributors should also understand the products they distribute and should take responsibility for the “accuracy and completeness” of marketing materials, even if they incorporate material produced by the provider. They should also be responsible for “compliance with local laws and regulations”.
Product providers, meanwhile, should ensure their term-sheets are accurate, fair, balanced and clear. They should also establish whether or not a distributor is appropriate to place the products by conducting a ‘know your distributor’ process. This could include the distributor’s typical client, regulatory status, reputation and compliance with selling laws. Distributors should also conduct a similar exercise, ‘know your provider’, along the same lines.
Sometimes, laws and regulations may not distinguish sufficiently between the roles of providers and distributors, creating uncertainty as to where the legal or regulatory liabilities may fall. “Providers and distributors should be aware of this and its consequences,” the guidelines say.
Finally, the trade bodies recommend that product providers and distributors should agree, and record their respective rolls and responsibilities towards investors.
The set of voluntary principles was endorsed by the European Securitisation Forum, the International Capital Markets Association, the International Swaps and Derivatives Association, the London Investment Banking Association and the Securities Industry and Financial Markets Association – which was formed last year through the merger of the Bond Markets Association and the Securities Industry Association.