Suitability Check and Household Investments in Structured Products

Authors: Eric C. Chang , Dragon Yongjun Tang , Miao (Ben) Zhang (2012)

Abstract: Consumer financial protection is an important issue in light of the suitability of complex retail financial products. The U.S. Dodd-Frank Act, for instance, establishes Consumer Financial Protection Bureau and mandates that financial intermediaries check suitability when selling structured products to retail investors. However, little empirical evidence exists on such transactions. In this study, we examine whether suitability check matters to household investments in structured products using data from Hong Kong. We find that investors purchase 8% more structured products, on average, when the suitability is not checked. The effect of suitability check is more pronounced for less financially literate investors. Moreover, investors tend to buy products with lower risk-adjusted returns when suitability check is neglected. Our evidence therefore supports strengthening consumer financial protection.

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