IOSCO takes on the risks of innovation

Amid the rise of finfluencers, gamification tactics and social-media marketing, policy-makers are grappling with how to address the accompanying novel risks to investors.

In a new report, the umbrella group of global securities regulators, the International Organization of Securities Commissions (IOSCO), set out its recommendations for regulators to ensure that policy and enforcement can keep up with the emerging challenges posed by the digitalization of marketing and distribution to retail investors.

In the new guidance, IOSCO said the use of gamification techniques and finfluencers that impact retail investor trading behaviour pose risks, as do other digital innovations, including complex crypto offerings that “give rise to novel regulatory and investor protection challenges, spanning the whole distribution chain.”

As these changes outpace regulatory frameworks, “there is a risk that retail investors could be exposed to harmful or even fraudulent online activity,” the report warned.

“Apparent risks are associated with the accrued complexity of financial products and services, the rapid pace of innovation, the ongoing gamification trends, and increasing levels and volumes of self-directed trading among retail investors, [which] may have not been accompanied by a proportionate increase in financial consumer education,” the report said. Keeping up with these trends poses a “big challenge” for regulators, it said.

IOSCO said its recommendations aim to enhance retail investor protection in light of these emerging threats by providing a “toolkit” of policy measures that regulators around the world can use to address these risks, along with a set of enforcement techniques that leverage technology-based investigative tactics and powers to help ensure compliance with these rules.

The policy measures set out in the report address rules for firms’ online marketing, distribution and online onboarding, including the supervision and proficiency requirements for these areas; cross-border compliance; and legal clarity for firms’ internet domain usage.

The enforcement tools detailed in the report cover proactive tech-based detection and investigation techniques, and the powers that regulators need to take action against illegal online activity and misconduct. It also calls for enhanced collaboration with foreign and domestic lawmakers, and technology service providers (such as web-hosting services).

IOSCO said the report forms part of its efforts to build “trust and confidence” in markets amid new and emerging opportunities and risks, which requires an “increased regulatory focus on digital marketing and offerings” and more efficient global collaboration to ensure investor protection.

“A digital revolution is sweeping the world of finance,” said Martin Moloney, IOSCO’s secretary general, in a release.

“This revolution allows firms to refine the techniques they use in their digital marketing,” he said. “While that innovation promises to provide investors with well targeted information, it also creates new risks to investors via systemic targeting and unsolicited offerings, sometimes underpinned by gamification and ‘finfluencer’ activity that is not always helpful to investors. Digital fraudsters can hide behind a ‘digital veil’ that makes it difficult for regulators to locate, identify and take action against them.”

Moloney said IOSCO’s policy and enforcement guidance is designed to “respond to the complex conduct challenges in today’s digital world, and to achieve better financial consumer outcomes.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.