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At a time when the Australian financial services sector is under scrutiny from all sides, there is an important change to financial service product providers. These obligations address the causes of some of the misconduct examined by the royal commission. Problem is, this new rule comes into effect very soon, and while deadlines for compliance have been extended to October 2021, many financial services providers may have lost momentum, and 6 months’ preparation time, thanks to COVID-19.
What are the new rules and regulations?
What we are talking about here are new financial product design and distribution requirements. Simply put, the objective is to give consumers more protection when they purchase financial products – think investments, insurance, credit, leases.
Essentially the new rules require both the suppliers – the banks, investment managers, insurance companies – and the distributors – think financial advisers, brokers and the like – to take a lot more care when they develop and sell these financial products.
Whilst this is something that has been bubbling away for quite some time it has probably been a little bit under the radar for many organisations – and this is a real risk, as some of the work required to meet these new rules is not straightforward. With the distractions of COVID-19, as well as other regulatory news – think Responsible Lending and AUSTRAC enforcement actions – this is something that has always been just over the horizon. The challenge is that it is now less than a year away, even with ASIC’s postponement.
What is the major issue at hand?
There are a couple of issues at hand for both suppliers and distributors. Firstly, among other things, the rules require something called a ‘target market determination’ to be made, and the delivery of the products to be in line with that target market determination.
What this means, for example is that if you have developed a product that is targeted to one sector of the market, you have to take steps to ensure it isn’t sold to those people outside of that target market. That might mean that you have to only distribute through certain channels, or through certain brokers. If you’re the product supplier you’ll also have to make sure that your distributors are working in line with the rules you’ve set.
Now, while this might sound relatively straightforward, the devil, as always, is in the detail. Being able to specify the class of consumers, their needs, and how a given product will meet these needs is likely to require significant amounts of quality data, and rigorous analysis. This is a task that is time consuming, and needs to be started early enough to enable action to be taken.
The second challenge is that the rules apply not only to new products, but also to continuing products – that is, products that are being sold today that will continue. This means that if you have a product that is currently being sold to a group that is not in your ‘target market’ that you may need to take steps to prevent that happening in the future. It’s not enough here to just say – that’s what we’ve done in the past.
What are the consequences for non-compliance?
Well, it’s no coincidence that these rules are coming hot on the heels of ASIC’s new product intervention powers – which are new rules that have come in this year increasing ASIC’s ability to intervene- for example require amendments to marketing, make rules about how certain products can be distributed, – right the way up to banning a product. It’s clear that there is a more active regulator here.
The other challenge is that this is a new set of rules, and, as is often the case, a regulator might be looking for an example to be made in order to set the bar for those new rules. There is significant reputational damage at risk if you are being taken to task for how you are delivering products to consumers.
What needs to happen next?
There are really two responses that are required here. The first is very specific and the second more broad. Firstly, if you haven’t already worked through your target market determinations, distribution models, and begun to consider the operational impacts of these, then now is the time to start. And if you’re a distributor, and you haven’t heard from the providers you work with, now is the time to understand where they are up to.
If you have started, or even are some of the way through this assessment, now is not the time to slow down – keep up the pace of work, and think broadly and deeply about the consequences of target markets, impacts on current products and how you might need to change operations, contracts and delivery models, especially with those ‘continuing products’.
Also, remember there are a number of other requirements that you will need to consider, including the need to maintain records of decisions you have made.
Secondly, and this is the broader piece, this is a great opportunity to consider how you stitch together all of your key risk, compliance and control activities across your business.
If you start with a clear understanding of your key controls, you will be far less likely to need to add on a whole number of additional steps – you can modify what you already have.
We’ve seen many times in the past, when a new rule or law is brought in, a whole bunch of new controls, procedures and systems being brought in to respond.
This adds cost, complexity and often results in non-compliance because rules are not built in to day to day operations.
So, in summary, if you invest in solid baseline controls, built once and built well, you’ll be more able to respond to these and all other new rules, coming down the track.