Sales and Marketing Guidelines for Ficial Products

Placement in MORB and MORNBFI

The Circular transfers and amends the contents of Appendix 26 of the MORB and Appendix Q-16 of the MORNBFI into Section X661 of the MORB and Section 4661Q of the MORNBFI, respectively (Section 1).
The Circular’s amended rule becomes “Section X661/4661Q Sales and Marketing Guidelines for Financial Products.” (Section 1).
The Circular deletes Appendices 26 and 26a of the MORB and Appendices Q-16 and Q-16a of the MORNBFI (Section 2).
All references to Appendix 26 of the MORB and Appendix Q-16 of the MORNBFI are amended to Section X661 of the MORB and Section 4661Q of the MORNBFI, respectively (Section 2).

Policy, purpose, and minimum expectations

A BSP-Supervised Financial Institution (BSFI) must always act with honesty, fairness, and professionalism, and pursue the best interests of clients (General Principles).
A BSFI acting as a dealer or broker must have a clearly articulated strategy for the sale and marketing of financial products and must manage risks arising from these activities while protecting clients (General Principles).
A BSFI must have appropriate policies, procedures, and controls to ensure product suitability and that (1) the client understands the nature of the transaction and risks, and (2) the transaction meets the client’s financial objectives and is aligned with the client’s risk tolerance (General Principles).
A BSFI must provide sufficient, accurate, and comprehensible information about products—including inherent risks—in a clear and balanced manner to enable informed financial decisions (General Principles).
A BSFI must apply the principle of proportionality in setting controls and must differentiate between less and more sophisticated clients and tailor client engagement accordingly (General Principles).
The BSFI’s sales and marketing policies, procedures, and controls must form part of its consumer protection risk management system, consistent with Circular No. 857 dated 21 November 2014 (General Principles).

Definitions and covered activities

Financial products mean debt and equity securities, hybrid securities, derivatives as defined under Section X611 of the MORB and Section 4611Q of the MORNBFI, securitization structures, and similar products with substantial investment characteristics (Section X661.2/4661Q.2).
A broker is a person engaged in buying and selling securities for the account of others (Section X661.2/4661Q.2).
A dealer is a person who buys and sells securities for own account in the ordinary course of business (Section X661.2/4661Q.2).
Complex products are financial products whose terms, features, and risks are not reasonably likely to be understood by a non-sophisticated client due to complex structure, are difficult to value, particularly when there is a very limited or no secondary market (Section X661.2/4661Q.2).
These guidelines apply to BSFIs acting as dealers or brokers of financial products and prescribe minimum standards for sales and marketing activities (Section X661.1/4661Q.1).
These guidelines apply to banks and non-bank financial institutions performing quasi-banking functions (Section X661.1/4661Q.1).
Trust departments are not covered; they continue to be governed by Part IV of the MORB and MORNBFI as applicable (Section X661.1/4661Q.1).
Cross-selling activities are governed by Section X172 of the MORB, as amended (Section X661.1/4661Q.1).

Client suitability: process and limits

A BSFI must ensure that products it recommends are appropriate through a client suitability process involving obtaining client information, classifying the client according to financial sophistication and risk tolerance, and conducting a suitability review (Section X661.3/4661Q.3).
If a BSFI cannot obtain sufficient information, it must refrain from offering or recommending any financial product (Client Information).
A BSFI may design and use its own system for obtaining client information, including questionnaires and interviews, but pre-formatted questions and responses must be fit for purpose and presented clearly, and technical terms must be explained as needed (Client Information).
A BSFI personnel must review the consistency and reliability of client responses using available documents, including publicly disclosed information and documents obtained from the client’s existing contractual relationships (Client Information).
A BSFI must maintain client information confidentiality and implement controls to ensure confidentiality and security (Client Information).
A BSFI must review and update client information (including classification) prior to transacting in a product new to the client, or earlier in case of material changes in the client’s financial situation or goals (Client Information).
For a legal entity or a group of two or more natural persons, a BSFI must obtain evidence that the client is specifically authorized to enter into relevant financial transactions and that the representative(s) are authorized to transact on behalf of the entity or parties (Client Information).
If a corporate client seeks to participate in complex products, the BSFI must require the client to include in the authorization document that it has appropriate risk management systems sufficient to manage and monitor risks it will take (Client Information).

Client classification and suitability review standards

A BSFI must classify clients into one of these sophistication categories: market counterparty, sophisticated institutional client, sophisticated individual client, or other clients (Section X661.3/4661Q.3(b)).
A BSFI must classify clients according to risk tolerance using at least Conservative, Moderate, and Aggressive categories defined by the client’s primary risk goal, ability to expose funds to risk for returns/objectives, or willingness to accept higher risks and volatility with possible loss (Section X661.3/4661Q.3(b)).
If a scoring system is used, the BSFI must ensure it is robust, fit for purpose, adequately tested; it must mitigate any limitation through client discussions and suitability review, and calibrate the system as necessary (Section X661.3/4661Q.3(b)).
A BSFI must make a record of each client’s sophistication and risk tolerance classification with sufficient information to support categorization (Section X661.3/4661Q.3(b)).
Before proposing or recommending a product, a BSFI must determine that the product is: (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 the client understands the nature and risks (Section X661.3/4661Q.3(c)).
A BSFI must inform clients of alternative products that are suitable to the client’s circumstances (Section X661.3/4661Q.3(c)).
A BSFI must maintain records of the suitability assessment and all information used as bases, including written documentation evidencing interviews and due diligence analyses where created (Section X661.3/4661Q.3(c)).
The BSFI is expected to conduct a more in-depth assessment before offering complex products (Section X661.3/4661Q.3(c)).
A BSFI is highly recommended to require the client to sign conformity to the suitability assessment (including the information on which it is based) (Section X661.3/4661Q.3(c)).

Product limits for conservative clients

A client classified as conservative may transact only in plain vanilla financial products listed under the rules on permissible instruments (Section X661.3/4661Q.3(c)).
For a conservative client, allowed instruments include: (i) peso-denominated Government securities representing direct obligations of the Government of the Republic of the Philippines; and (ii) foreign currency-denominated Government Securities representing direct obligations of the Government of the Republic of the Philippines (Section X661.3/4661Q.3(c)).
For a conservative client, allowed instruments also include: (iii) highly liquid sovereign bonds, corporate bonds, and commercial papers issued offshore rated at least aAA-a (or its equivalent) by a reputable international credit rating agency; and (iv) highly liquid domestic corporate bonds and commercial papers rated at least aAAAa (or its equivalent) by a reputable credit rating agency (Section X661.3/4661Q.3(c)).
For a conservative client, allowed instruments also include foreign exchange derivatives solely for hedging, subject to the results of the suitability review (Section X661.3/4661Q.3(c)).

Market counterparty suitability exception

When a client is classified as a market counterparty, a BSFI does not need to comply with the required suitability review due to the client’s recognized sophistication (Section X661.3/4661Q.3(c)).
Even with the exception, the BSFI should be able to provide sufficient support for its classification (Section X661.3/4661Q.3(c)).

Overrides and prohibitions on waivers

A BSFI must implement appropriate controls to deter unauthorized overriding of suitability results (Section X661.3/4661Q.3(c)).
When a client insists on transacting in a previously assessed unsuitable product, the BSFI must obtain the client’s confirmation in writing that: (a) the BSFI informed the client of protections the client may lose and the risks the client is exposed to; (b) the client still wishes to proceed; and (c) the client fully understands and is willing to take the attendant risks (Section X661.3/4661Q.3(c)).
A BSFI must not offer clients an option to automatically and comprehensively waive the outcome of the client classification process and the resulting protections under the rules on client suitability (Section X661.3/4661Q.3(c)).

Disclosure obligations for promotions and products

A BSFI must ensure clients understand the nature of and risks in financial transactions in statements made in promotions, marketing, sales, and required disclosures (Section X661.4/4661Q.4).
A BSFI must take additional steps to disclose risks when dealing