Monitoring product design & distribution obligations
ASIC released Regulatory Guide 274 Product design and distribution obligations (RG 274) for issuers and distributors of financial products that must comply with the design and distribution obligations. The changes will significantly alter the way financial products are formed, marketed, and promoted, with the commencement of the new laws scheduled from 5 October 2021.
What you need to do
As part of this requirement, Issuers and distributors must implement and maintain robust and effective product governance and monitoring arrangements to ensure that they comply with the design and distribution obligations.
Robust product governance arrangements will help issuers and distributors avoid similar outcomes to those identified by the FSI (financial system inquiry) and the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) and assist in the management of non-financial risk. The FSI highlighted that weaknesses in processes for, and controls on, product distribution to consumers have led to significant consumer losses.
To get started, assess your organization’s current product governance arrangements against what ASIC has outlined as its expectations for such arrangements in RG 274. Map out and document the characteristics of the target markets for each of the products you issue or distribute that are within the scope of the obligations.
The design and distribution obligations impose requirements at each stage of developing and distributing a financial product.
These stages are depicted in the above figure. These stages are:
(a) product design
(b) product distribution
(c) monitoring and review
All of these must be considered when implementing and maintaining product governance arrangements.
Product governance arrangements must include ongoing control monitoring and feedback loop for product performance through which issuers address problems when they arise. The feedback provides issuer knowledge on how consumers in the target market using its product and outcomes.
- An issuer must notify ASIC if it becomes aware of a significant deal in the product that is not consistent with the target market determination as soon as practicable (within 10 business days).
- A distributor must notify the issuer if it becomes aware of a significant dealing in the product that is not consistent with the target market determination as soon as practicable (within 10 business days)
Control Monitoring for the issuer
Product governance arrangements must include appropriate processes and controls. Effective communication needs to include those responsible for designing the financial product and those responsible for marketing and distributing the product. Automation of control monitoring and reporting will play a critical role not only in managing risk but also in driving better consumer outcomes. Below are some example control objective scenarios
Control Monitoring for the distributor
Examples from RG 274.210 (Reasonable steps for distributors)
Direct life insurance is sold to consumers by insurers or their sales partners over the phone, online or face-to-face. These products are sold with general advice (meaning a consumer’s individual circumstances are not considered), or with no advice (meaning only factual information is given).
In REP 587, ASIC found that sales practices for direct life insurance and the design of the product itself were leading to poor consumer outcomes. Practices such as pressure selling and inadequate explanations of future costs and product exclusions resulted in high rates of cancellations during the cooling-off period, short-term lapse rates, and poor claims outcomes.
Therefore, for this product, ASIC expects distributors to consider the following as part of their reasonable steps obligations:
- the level of oversight to apply, including the provision of training and scripts to set clear professional standards for sales conduct (e.g. setting standards for how distributors behave with vulnerable consumers);
- the appropriate controls to apply, including implementation of quality assurance, audits that monitor sales conduct and policies that resolve poor consumer outcomes;
- the product’s distribution conditions;
- the choice architecture employed; and
- sufficient monitoring of consumer outcomes to ensure that the distribution processes are performing in line with expectations.
Contact us (email@example.com) to schedule a time to discuss below
- Product design & distribution obligations and requirements
- Automation strategy for issuer & distributor
- Risk management strategy & mitigation plan
- Demo of RG 274 compliance automation