Talk to us today about how the new obligations will affect your financial services organisation.
Much has been written about responsible lending since the Royal Commission into Financial Services. On the 19th of December 2019, ASIC released an update to their Regulatory Guide 209 – Credit licensing: Responsible lending conduct. This guide is all about how individual credit applications should be treated.
There was another Draft Regulatory Guide issued by ASIC in December too – Consultation Paper (CP 325) – Product design and distribution obligations. This CP generated far fewer column inches of press yet arguably may change the credit landscape to a greater degree than RG 209.
The opportunity to make submissions to the consultation period ends on 11 March.
It is our expectation, based on the history of the degree of change between draft and final RG versions, that little will be changed and almost certainly very little that is material to the core of the intended outcomes.
The new obligations, which deal with product design and distribution, come into effect on 5 April 2021 – so not immediate, however, when you consider what is involved it seems clear they will prove a challenge even for those who start working on them now.
The ‘so what’ in brief
(assuming the drafting is not changed)
- These obligations apply to virtually every new or existing financial services product that will be sold going forward
- They require defining who the ‘target market’ is and how the product is meant to operate to the target market customer’s benefit
- They require establishing a ‘product governance framework’ – i.e. specification for end-to-end credit lifecycle management…setting performance expectations, monitoring them, reporting on them, trigger thresholds, governance, action item management…all of which must be documented
- Products without this documentation will no longer be able to be sold
- There are obligations on BOTH the issuer of the credit and those involved in distribution (including brokers) to ‘manage’ the delivery of the product consistent with its design….in other words ensuring that those who take up the product realise the benefits intended for them
- Where performance does not equal the stated expectations, there is a reporting obligation to tell ASIC within 10 days
- Additionally, in such cases where expected outcomes ‘for customers’ are not realised either the distribution or the product needs to be changed, or the product must no longer be sold.
A preview of the new guidelines
Quickly, here is a ‘flavour’ of the new guidelines and an example re. credit cards that we would suggest will fundamentally change that industry segment.
From CP 325
We expect product design to be driven by features that benefit the consumer. The design and distribution obligations mean that a product development process that does not consider consumer outcomes will not be feasible. For example, we expect that in complying with the obligations, some issuers will conclude that a financial product or product feature is unlikely to be consistent with the objectives, financial situation and needs of any consumers. This may be due, for example, to risk, low value, or because the product is inherently flawed.
Product design and development (including the assessment of whether a product is likely to be consistent with the likely objectives, financial situation and needs of consumers for whom it is intended) is an iterative process. After a financial product has been launched, an issuer should draw on its own data about how consumers in the target market are using its product and the actual consumer outcomes from the product: see RG 000.127–RG 000.130. When problems are identified, this should feed back into the product design as part of ongoing review processes: see s994C
From Example 1:
We expect issuers to consider the appropriate target market for each distinct credit product. For example, higher cost credit cards that may offer other features, such as complimentary insurance coverage and rewards programs, but have interest rates exceeding 20%, are unlikely to be suitable for those consumers who are likely to carry a substantial balance on their card over a prolonged period, or for consumers whose objective is to reduce their credit card debt over a period of time.
What can you do now?
For those seeking to know more about what is coming, especially what we see as:
- the practicalities involved in the work required
- its potential consequences on portfolio profitability
we would be happy to speak with you. Our team is highly experienced in helping financial services organisations improve organisational capability through risk and compliance, governance and assurance, and board effectiveness.