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The Monetary Board, in its Resolution No. 1811 dated 29 October 2015, approved the following guidelines governing the sales and marketing of financial products,  which  replaces  the  sales  and  marketing  guidelines  for  derivatives under  Appendix  26  of  the  Manual  of  Regulations   for  Banks  (MORB)  and Appendix Q-16 of the Manual of Regulations for Non-Bank Financial Institutions (MORNBFI).

Section 1. The contents of Appendix 26 of the MORB and Appendix Q-16 of the MORNBFI are hereby transferred to Section X661 of the MORB and Section 4661Q of the MORNBFI, respectively, and amended to read as follows:

“Section  X661/4661Q   Sales  and  Marketing  Guidelines   for  Financial Products.

General  Principles.  A  BSP-Supervised   Financial  Institution  (BSFI)  shall always act with honesty, fairness, and professionalism,  and pursue the best interests of its clients. Due to the increasingly sophisticated products being introduced  in the market, a BSFI acting as a dealer or broker shall have a clearly articulated  strategy for the sale and marketing  of financial products. The BSFI is expected  to manage the risks arising from such activities and protect the interest of its clients. In this regard, a BSFI shall have appropriate policies,  procedures  and  controls  in  place  to  ensure  the  suitability  of  the products  being  offered  to  its  clients.  It  shall  ensure  that  (1)  the  client understands the nature of the transaction and the risks involved and (2) the transaction  meets  the  client's  financial  objectives  and  is  aligned  with  the client’s risk tolerance. It shall also provide sufficient, accurate and comprehensible  information about the products, including inherent risks, in a clear and balanced manner to enable its clients to make informed financial decisions.

The BSFI shall be guided by the principle of proportionality in setting policies
and procedures for its sales and marketing activities. It shall differentiate between less and more sophisticated clients, and tailor the manner by which they are engaged in accordance  with such sophistication.  Controls shall be in place to ensure that the BSFI complies with its internal policies and procedures, as well as relevant rules and regulations. At the minimum, BSFIs must satisfy the expectations set out in these guidelines.

The BSFI’s sales and marketing policies, procedures and controls shall form part of its consumer protection risk management system, consistent with the regulations on financial consumer protection set forth under Circular No. 857 dated 21 November 2014.

§ X661.1/4661Q.1 Scope of Application. These guidelines prescribe the minimum  standards  for  sales  and  marketing  activities  of BSFIs  acting  as dealers or brokers of financial products.

These shall apply to all banks and non-bank financial institutions performing quasi-banking functions. Trust departments shall not be covered by these regulations; they shall continue to be governed by the provisions of Part IV of the  MORB  and  MORNBFI  as  applicable.  Likewise,  cross-selling  activities shall not be covered by these guidelines; they shall be governed by the provisions of Section X172 of the MORB, as amended.

§ X661.2/4661Q.2 Definition of Terms. For purposes of this section, the following terms shall have the meanings set forth below:

a.   Financial products – refer to debt and equity securities, hybrid securities, derivatives as defined under sections X611 of the MORB and 4611Q of the MORNBFI, securitization  structures, and similar products with substantial investment characteristics.

b.   Broker  –  a  person  engaged  in  the  business  of  buying  and  selling securities for the account of others.

c.   Dealer – a person who buys and sells securities for own account in the ordinary course of business.

d.   complex products – refer to financial products whose terms, features and risks are not reasonably  likely to be understood  by a non-sophisticated client because of their complex structure, and which are also difficult to value, particularly when there is a very limited or no secondary market.

§ X661.3/4661Q.3  Client Suitability  Guidelines.  A BSFI shall ensure that the financial products it recommends to a client are appropriate for that client through  a  client  suitability  process,  which  involves  obtaining  client information, classifying a client according to financial sophistication  and risk tolerance, and conducting a suitability review.

a.  Client Information

The BSFI shall obtain necessary  and sufficient information  about the client that will serve as bases for its suitability assessment. At a minimum, the following information shall be obtained in addition to the basic account information:

•  Investment amount/investible funds or amount of exposure to be hedged;

• Financial  situation  –  the  client’s  financial  standing,  which  includes information  on assets, net worth, financial  commitments,  regular income, and capacity to withstand losses arising from financial transactions;

• Knowledge   of  financial   products   –  the   client’s   knowledge   and understanding of the financial markets and products and the risks involved therein;

• Investment/hedging  experience  –  the  nature  of  investments  and/or derivatives  transactions  undertaken  by the client,  including  the length  of time, frequency of dealings, and the extent to which he/it has relied on the advice of a bank or a financial advisor, if any;

• Financial objectives – the client’s goal or purpose for entering into a transaction, whether it be for regular income, capital appreciation, capital preservation, maintenance of purchasing power, hedging as against investment, and/or long-term buy and hold as opposed to short-term active trading;

•  Risk appetite – the level of risk a client is willing to take;

• Holding period or investment horizon – the length of time over which the position or exposure to be hedged will be held by the client;

•  Regulatory  and legal constraints  – prohibitions  or limitations  imposed  on the activity of the client by existing laws, rules, and regulations, and;

•  Liquidity needs – the client's need to convert positions into cash and the timing of such requirement.

To foster cooperation from the client, the BSFI shall explain the reason for assessing suitability. If the BSFI is unable to obtain sufficient information,  it shall refrain from offering or recommending any financial product.

A BSFl may design and use its own system for obtaining client information, which may include questionnaires and interviews. However, pre-formatted questions and responses shall be fit for the purpose and presented in a clear and understandable  manner. Likewise, technical or unfamiliar terms shall be explained as needed, in order to prevent different interpretations and/or erroneous responses.

While  the client  is responsible  for providing  accurate  and updated information,  BSFI personnel shall exercise diligence in reviewing the consistency  of  the  responses  and  reliability  of  the  information  provided based on available  documents,  such as publicly  disclosed  information  and those  obtained  from  the  client's  existing  contractual  relationships  with  the BSFI.  It is highly  recommended  that  the  BSFI  requests  for documents  to support the client’s representations, particularly where the client wishes to transact  in complex  products.  Subsequent  changes  to client information,  if any, shall be adequately documented and concurred with by the client along with the discussions and/or clarifications made.

For a legal entity or a group of two or more natural persons, the BSFI shall obtain evidence that: (1) the client is specifically authorized to enter into all or specific  kinds of financial  transactions,  and (2) the client’s representative/s is/are  authorized  to  carry  out  transactions  on  behalf  of  the  entity/other parties, in accordance with the applicable legal framework.

When gathering information from a representative,  the BSFI should be able to  demonstrate  that  it  has  taken  steps  to  ascertain  that  the  information obtained is reflective of the entity or group’s situation. In addition, it shall determine  if  the  client  has  competent/qualified   personnel  to  handle  the proposed activities.

If a corporate client seeks to participate in complex products, the BSFI shall require  the  client  to  incorporate  in  the  document  authorizing  the  latter's activities that it likewise has appropriate risk management systems sufficient to manage and monitor the risks it will take.

At  a  minimum,  client  information,  including  client  classification,  shall  be reviewed  and updated  prior to transacting  in a product  that is new to the client, or earlier in case of material changes in the client’s financial situation or  goals.  Adequate  controls  shall  be  implemented  to  ensure  the confidentiality and security of client information.

b.   Client Classification

Based on the information obtained from a client, a BSFI should be able to classify a client into one of the following categories according to financial sophistication:

•  Market counterparty – refers to any financial institution, only with respect to the instruments in which it is authorized to engage as a broker dealer;

•  Sophisticated  institutional  client –  refers  to  an  institution  that  is  not  a market counterparty  but has the level of net worth, knowledge, expertise, and experience to deal with financial products;

• Sophisticated  individual  client  –  refers  to  an  individual  who  has demonstrated  to the BSFI that he has the level of net worth, knowledge and experience to deal with financial products; or

•  Other  clients –  refer  to  all  other  institutional  or  individual  clients  not categorized as market counterparty, sophisticated institutional client or sophisticated individual client.

BSFIs are encouraged to adopt a more granular categorization  according to financial sophistication, provided that the categories can be mapped into the broad  classifications   above  and  the  differences  between  categories  are clearly set out.

In addition,  a BSFI shall classify  a client  according  to risk tolerance.  This entails assessing the client’s preferences, willingness to take on the risks associated  with a product, and ability or capacity to absorb the losses that may arise from such product, as well as whether such losses will have a detrimental impact on the client's financial condition. At a minimum, a BSFI’s classification of a client according to risk tolerance shall include, but need not be limited to, the following categories:

•  Conservative – client prefers an investment and/or hedging strategy where the primary goal is to prevent the loss of principal;

•  Moderate – client is willing and able to expose funds to a moderate level of risk in consideration for higher returns or to meet certain objectives; and

•  Aggressive  –  client  is  willing  and  able  to  accept  higher  risks  involving volatility  of  returns  and  even  possible  loss  of  investment  in  return  for potentially higher long-term results.

Whenever a scoring system is used for client profiling, the BSFI shall ensure that the system is robust, fit for the purpose, and adequately tested. Any limitation in the system shall be mitigated through client discussions and the suitability  review  process.  The system  shall be calibrated  as necessary  to reflect appropriate results.

The BSFI shall make a record of the classification under which each client is categorized,  including  sufficient  information  to  support  the  categorization. The classifications of the client according to sophistication and risk tolerance shall  serve  as  bases  for  the  BSFI’s  product  offerings  and  the  level  of disclosures required.

c.   Suitability Review

Before proposing  or recommending  a particular  product to a client, a BSFI
shall determine that the product is:

•  Suitable to the client’s needs, financial situation, and objectives;

•  Consistent with the client's mandate, risk tolerance, and constraints; and

•  Aligned   with  the  client’s   knowledge   and  experience,   such  that  he/it understands the nature of and risks associated with the product.

Likewise,  the  BSFI  shall  inform  its  client  of  alternative  products  that  are suitable to his/its circumstances.

A BSFI shall maintain a record of the assessment as well as all information used as bases of its suitability review. This includes written documentation to the extent that such was created to evidence interviews and analyses made in the performance  of its due diligence  process.  The BSFI  is expected  to conduct a more in-depth assessment before offering complex products. It is highly recommended that a BSFI requires a client to sign his/its conformity to the suitability assessment (including the information on which it is based) in order to avoid disputes with the client.

A client who is classified as conservative may only transact in plain vanilla financial products as follows: (i) peso-denominated Government securities representing direct obligations of the Government of the Republic of the Philippines; (ii) foreign currency-denominated Government Securities representing direct obligations of the Government of the Republic of the Philippines;  (iii) highly liquid sovereign  bonds, corporate  bonds, and commercial papers issued off-shore rated at least “AA-“ or its equivalent by a reputable   international   credit  rating   agency;   (iv)  highly   liquid  domestic corporate   bonds   and   commercial   papers   rated   at  least   “AAA”   or  its equivalent by a reputable credit rating agency; and/or (v) foreign exchange
derivatives solely for hedging, subject to the results of the suitability review.1

In cases where the client is classified  as a market  counterparty,  the BSFI does not need to comply with the required suitability review, considering the client’s recognized sophistication. However, a BSF| should be able to provide sufficient support for its classification.

Appropriate controls shall be in place to deter unauthorized overriding of the results of the suitability assessment. A BSFI shall only offer the range of products   that  is  viewed   as  suitable   for  the  client.  Nevertheless,   it  is recognized that, in certain instances, a client may insist on transacting in a particular product that has previously been assessed as unsuitable for his/its profile. In such cases, the BSFI shall obtain the client’s confirmation in writing that:

(a)  The BSFI has informed the client of the protections  he/it may lose and conversely, of the risks that he/it is exposed to,

(b)  The client still wishes to proceed with the transaction despite the BSFI’s assessment, and

(c)  The client fully understands  and is willing to take the risks attendant to the product to be availed of.

However,   in  no  case  shall  the  BSFl  offer  to  its  clients  the  option  to automatically  and comprehensively  waive  the outcome  of the client classification  process  and the resulting  protections  offered  by the rules on client suitability.

§ X661.4/4661Q.4 Disclosures. A BSFI shall always be mindful of its statements regarding its products/services, whether the statements pertain to promotion, marketing or sale thereof or in the course of making the required disclosures.  It shall institute measures  to ensure that its clients understand the nature of and risks in a financial transaction. Although a BSFI can tailor- fit information, marketing and sales presentations/materials  depending upon the sophistication  of its client, it shall institute  measures  to ensure  that its clients understand the nature of the financial transaction. The BSFI shall also take further steps to adequately disclose the attendant risks of the financial transactions when dealing with an unsophisticated  client, either generally or with  respect  to  a  particular  product  being  offered.  A  BSFI  shall  adopt standards  for its publications/materials/disclosure  statements  and regularly review   the   aforementioned   documents   to   ensure   that   they   meet   the standards.

A BSFI  shall  not  misrepresent  or give  a false  impression  of the  financial products it offers in any of its advertisements, electronic communications, written  materials  (whether  publicly  disseminated  or  not)  or  oral representations. A misrepresentation  is any statement that deviates from the truth or omits a material fact or even tends to mislead the recipients.

a.   Financial promotion (marketing and sales)

A BSFl embarking on a financial promotion, whether through a direct offer or information/sales  publications, shall ensure that it gives sufficient information on  the  entire  transaction,  including  the  underlying  financial  instruments,  if any,  to  enable  a  client  to  make  an  informed   decision.   A  BSFI  shall prominently  indicate its name in all its promotional  materials and specify its role or capacity in the transaction (e.g., issuer, dealer, broker).

A financial promotion is considered clear, fair and not misleading if all of the following requisites are present:

•  The information provided does not only emphasize the potential benefits of the  product  but  also  presents  a  fair  and  prominent  description  of  the relevant risks and assumptions;

•  It   draws   the   customer’s   attention   to   the   warnings,   exclusions   and disclaimers in all documents relating to the financial product;

•  The  design,  content  or  format  of  the  presentation  does  not  disguise, obscure or diminish the significance of any statement, warning or other matters that the customer should be aware of;

•  A client, by himself, can discern from the presentation whether a statement
is a fact, promise or forecast;

•  The accuracy of all material statements of fact can be substantiated;

•  Any  comparison  or  contrast  of  a  product  offered  is  made  with  another product that is intended to meet the same needs or to serve the same purpose. The comparison or contrast shall include all relevant factors. The facts presented shall be verifiable; alternatively, the relevant assumptions shall be disclosed;

•  No reference to an approval by a regulatory body or its officials is made, unless a written approval was actually obtained;

•  A recommendation to consult/refer to a financial advisor is made; and

•  It does not omit any information, the omission of which causes a material fact to be misleading, unclear, or unfair.

A BSFI shall consider the client's knowledge of the transaction to which the given information relates. However, it shall not assume that clients/recipients necessarily  have an understanding  of the product  being promoted.  It shall also  assess  its  usage  of  terms,  especially  those  which  are  technical  in nature. If promotional or marketing materials are specially designed for a targeted client base that is reasonably believed to have particular knowledge of the investment, this fact shall be made clear in the materials.

b.   Product disclosures

A BSFI shall endeavor to explain the financial products it offers to its clients to enable the latter to make an informed decision. Product disclosures shall present  an  adequate  description  of  (a)  the  nature  and  features  of  the financial product, including  any underlying  instrument(s),  (b) the amount of outlay  required,  (c)  the  costs  involved,  and  (d)  the  risks  related  to  the product.  In  general,  disclosures  shall  always  be  presented  in  a balanced manner whereby the potential benefits of a product are tempered by a fair indication of the risks involved.

Disclosure statements shall be presented in a clear, concise and effective manner  to promote  the  client’s  understanding  of the  product.  The  use  of industry and legal jargon shall be minimized to the extent possible. If such cannot be avoided, these terms shall be clearly defined and explained to the client.  A  greater  level  of  disclosure  shall  be  provided  if  a  product  is  not generally understood by clients, for instance, in the case of new or complex products.

Should the BSFI make use of materials provided by the issuer of a particular instrument, the client shall be made aware that the issuer is responsible for the representations contained therein. However, the BSFI is responsible for communicating the relevance of said materials to the client.

A   product   disclosure   that   includes   an   illustration   of   past   or   future performance shall comply with the following:

a.   When the product’s past performance is used to illustrate possible future returns,   the   disclosure   shall   state   that   past   performance   is   not necessarily  indicative  of future performance.  This shall be presented  in the  main  text  of the  presentation  material.  Past  performance  shall  be culled  from  a  reasonable  time  frame  to  provide  a  fair  and  balanced indication of a product’s performance;

b.   When  using  any  forecast  on  the  economy  or  financial  markets,  the disclosure  shall state that such forecast is not necessarily  indicative  of the future performance of the product; and

c.   Illustrations  of returns  shall include  worst-case  scenarios  (i.e., not just the likely or best scenarios). Benefits shown in headline rates (proforma returns highlighted) should be realistic and achievable, and not based on unreasonably optimistic views of events.

Disclosures for products with some form of guarantee or protection should highlight which benefits are guaranteed/protected  and those which are not. In instances where the guarantee or protection involves a cost to the client, the BSFI shall disclose the fees or charges for the same. A BSFl shall also disclose to the client the counterparty (e.g., issuer/guarantor) risk involved so that   he/it   is   not   misled   about   the   product's   capital   security/principal protection.   When   applicable,   a  BSFI  shall  state   if  the  guaranteed   or protected amount is payable only at the end of the term.

Product disclosures for leveraged transactions2  should emphasize that while these   types   of  products/strategies   amplify   the  potential   gain   from   an investment, they also increase the potential loss thereof. A client who intends

to engage in margin buying, a means of applying leverage in investing, shall be cautioned on possible loss exceeding the margin or initial cash outlay.

c.   Minimum required disclosures

The minimum required disclosures shall always be in writing. A BSFI shall require its client to sign or initial the disclosure statement as affirmation of the client’s  receipt  and  understanding  of the  disclosure  statement,  unless  the client  is a market  counterparty.  A BSFI  may  opt  to draft  an  individual  or separate  disclosure  statement  for its client or incorporate  the same in the main transaction agreement/contract.

Product-specific minimum disclosures shall include:

- The nature of the financial product, including the underlying financial instruments, and how these products work;

-  Investment horizon or tenor of the financial product;

-  Fees and charges, if any;

- Details on the issuing entity in case the dealing BSFI is not the issuing institution (i.e., the BSFI acts as a broker/ dealer or market maker);

-  Returns  or benefits  likely to be derived  from the instrument,  the amount and timing thereof and whether the benefits are guaranteed or not;

- All risk factors that may result in the client receiving returns less than the illustrated  returns  and  factors  affecting  the  recoverable  amount  by  the client;

-  Details of conflicts of interest, if any;

-  Information on the handling of complaints related to the product;
- All  termination  clauses,  when  appropriate,  including  charges  and restrictions;

-  Any warning, exclusion or disclaimer in relation to the risk and rewards of
the product, including, but not limited, to the following:
o The  product  carries  higher  risks  than  those  associated  with  ordinary bank savings or time deposits;
o The product is risky and may not be appropriate if the client is not willing and able to accept the risk of adverse movements in the underlying securities or reference rates;
o Past  performance   of  the  product   is  not  a  guarantee   of  its  future performance.

-  Other  Disclosures   that  may  be  required  by  existing  laws,  rules  and regulations;

Where  applicable,  a  BSFI  shall  draw  the  attention  of  the  client  to  the following:

-  The effect of early redemption  of a product on the return (e.g., penalties and/or poor returns);

-  The availability of maximum benefit advertised after a specified period; and

-  The  required  conditions  for  the  advertised   growth  rate  of  income  to materialize.

Complex products should carry a standard warning that they are not suitable for all clients,  and are intended  for experienced  and sophisticated  clients.

They should likewise carry appropriate warnings on the high economic risks of the transaction, such as:

-  Loss of all or a substantial portion of the investment due to leveraging or other sophisticated practices;

-  Mismatch between the change in the price of a hedge versus the change in the price of the exposure it hedges;

-  Volatility of returns;
-  Lack of liquidity considering that there may be no secondary market for the instrument;

-  Restrictions on transferring interests; and

-  Absence of information regarding valuation and pricing.

§ X661.5/4661Q.5 Sales and marketing personnel. Any informational or promotional  presentation  regarding  financial  products  shall  be  undertaken only by personnel who are knowledgeable on the products involved. In assessing   the  knowledge   of  its  personnel,   a  BSFI  may  consider  their educational background; relevant training; certification; and professional experience in rendering investment advice, making presentations regarding financial products and/or assessing  the propriety of financial products for a client. The personnel  involved  in the transactions  shall likewise  be familiar with all relevant laws and applicable rules and regulations and shall ensure compliance therewith.

At a minimum, a BSFI shall establish qualification standards for personnel involved in sales and marketing activities and require compliance with the registration requirements prescribed by existing securities laws, rules and regulations. In addition, a BSFI shall implement, and maintain a reasonably comprehensive   system   of   training   geared   at   enhancing   the   technical knowledge  of its personnel  to enable  them  to understand  and explain  the nature and risks of a BSFI’s financial products, and ensure client suitability.

Management shall regularly review the BSFI’s compensation and incentive programs  and  ensure  that  such  remuneration  schemes  do  not  place  the interests of the sales and marketing personnel in conflict with those of their clients.

The BSFI’s board of directors and senior management shall be liable for the acts performed and representations made by sales and marketing personnel in their official capacity. Notwithstanding the foregoing, a BSFl,s board of directors and senior management are not precluded from filing the necessary action against the erring sales and marketing personnel.

§ X661.6/4661Q.6 Role of Control Functions. The control functions shall periodically monitor and evaluate the continuing effectiveness and adequacy of  the  sales  and  marketing  policies  and  procedures.  They  shall  regularly provide senior management or the Board, as appropriate, with written reports on the results of their review.

A BSFI’s  operational  risk  management  framework  shall  take  into  account sales   and   marketing   activities   in   the   identification   and   assessment, monitoring   and   reporting,   and   control   and   mitigation   of   risks.^[3]     The compliance  function referred to in § X180.2/§ 4180Q.5 shall be responsible for monitoring  and assessing  the BSFI’s  compliance  with applicable  taws, rules and regulations in the conduct of sales and marketing activities. The internal audit function shall include in its scope the review and evaluation of the BSFI’s compliance with internal policies and procedures for the sales and marketing of financial products, issuance of recommendations  based on the results of the audits conducted, and the verification of compliance with those recommendations,  in accordance with § X186.2/§ 4186Q.2, as amended by Circular No. 871 dated 05 March 2015.

§  X661.7/4661Q.7  Record  Retention. Documents  evidencing  compliance with this Circular shall be retained for a period of not less than five (5) years unless  an investigation  is being  conducted,  or a criminal,  civil, or administrative  case has been filed in a competent  judicial or administrative body where a client is involved or impleaded as a party to the case or investigation.   In  such  cases,  the  above  documents   shall  be  preserved beyond the five-year period until such time that a final judgment has been reached by the judicial or administrative body.

§ X661.8/4661Q.8  Enforcement Actions. The BSP may deploy its range of supervisory  tools  to  promote  adherence  to  the  requirements  set  forth  in these guidelines  and bring about timely corrective  actions  and compliance with BSP directives. Sanctions may likewise be imposed on the BSFI and responsible  persons,  which  may  include  restrictions  or  prohibitions  from certain  authorities/activities;  and  warning,  reprimand,  suspension,  removal and disqualification of concerned directors, officers and employees.

Section 2. Appendices 26 and 26a of the MORB and Appendices Q-16 and Q-16a of the MORNBFI are hereby deleted.

References made to Appendix 26 of the MORB and Appendix Q-16 of the MORNBFI shall be amended to Section X661 of the MORB and Section 4661Q of the MORNBFl, respectively.

Section  3. Transitory  Provision.  BSFIs  shall  be  given  three  (3) months from the effectivity of this circular to make appropriate changes in their sales and marketing policies, processes and materials in order to comply with the above requirements.

Section  4. Effectivity.  This Circular  shall take effect fifteen  (15) calendar days following its publication either in the Official Gazette or in a newspaper of general circulation.

FOR THE MONETARY BOARD:

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^[1] The BSFI is expected to have an internal policy for the identification of reputable credit rating agencies and prudent use of external credit assessments.

^[2] Leverage or gearing can be employed in a structured product t in order to offer higher yields.

^[3] BSFIs should refer to existing Guidelines on operational Risk Management.”