The Board of the International Organisation of Securities Commissions recently published a report that seeks to assist regulators in responding to the retail market conduct issues caused by stress events such as the current COVID-19 pandemic. Enhancing investor protection and investor confidence in the integrity of securities markets are fundamental objectives for IOSCO. The report examines common retail misconduct risks that have arisen in the financial services industry during the pandemic and sets out measures to assist authorities in responding to this unprecedented and challenging environment. The report, prepared by IOSCO’s Retail Market Conduct Task Force (RMCTF), shares preliminary findings and observations of IOSCO member experiences and identifies the common drivers of firm and retail investor behaviour, which together create increased opportunities for potential misconduct in periods of stress.
Drawing on case studies from IOSCO members, the report also describes the measures that IOSCO members have used to mitigate these risks and derives lessons from their experiences. The report describes how the COVID-19 crisis impacted firm and retail investor behaviour. IOSCO findings indicate that extreme price volatility during March-April 2020 and the growing pressure of COVID-19 on firms’ profitability may have resulted in increased offerings of riskier products and retail investor flow into such products. The COVID-19 experience also highlights that retail investor vulnerability may take many forms and vulnerable investors may be more susceptible to financial exploitation during periods of market stress.
IOSCO’s findings demonstrate a spectrum of retail misconduct ranging from the more egregious examples of fraudulent or predatory practices by unlicensed operators to incidents of inadvertent misconduct by regulated entities. Common types of potentially harmful behaviour that may increase during periods of stress include mis-selling; mis-labelling; and misleading disclosure and investment advice.
Based on its review of the case studies, IOSCO suggests a number of measures that regulators can take in responding to the challenges created by the COVID-19 pandemic. These measures include:
- Proactive monitoring of investor behaviour and offerings targeting vulnerable investors
- Supervisory scrutiny of certain firm behaviour which may flag potential misconduct
- Regulatory communication during periods of stress
- Monitoring of return to normal and taking effective enforcement action
- Leveraging on experience from periods of stress (such as COVID-19) to enhance regulatory requirements and approaches •
- Cross-border cooperation and regulatory coordination
- Addressing risks emerging from remote working and social distancing requirements
The RMCTF will be building on its work to develop targeted guidance to regulators to deal with retail market conduct issues, drawing key lessons from this report and those from other international bodies that may have cross-sectoral implications.
Source: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)
