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The regulatory perspective — Product governance regime for financial products

The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 was introduced into Parliament on 20 September 2018.

The bill will introduce a governance regime for the design and distribution of financial products, increasing accountability on firms.

The new regime was recommended by the Financial System Inquiry, which highlighted problems with products not meeting the needs of consumers who purchased them, and the potential for improvement in the product design phase.

The bill will also introduce a new intervention power for ASIC focussed on reducing the risk of significant detriment to consumers.

Better outcomes for consumers

ASIC’s vision is for a fair, strong and efficient financial system for all Australians.

We have welcomed the Government’s decision to introduce the bill, which will implement a number of measures that will promote better, fairer outcomes for consumers in the financial services industry.

Design and distribution obligations

The design and distribution obligations are a principles-based product governance framework that will require issuers and distributors of financial products to appropriately design, market and distribute financial products.

Firms will need to consider the type of consumer whose financial needs would be addressed by buying the product, and the distribution channel best suited to reaching the target market. These are important principles that are not covered by existing laws.

The regime will impose requirements on firms to:

  • define an appropriate target market for the financial products they design
  • target distribution to consumers within the target market
  • review target markets and approaches to distribution if problems arise.

ASIC must be notified if there is a significant dealing in the product that is not consistent with the target market determination. ASIC will also be given new powers to obtain necessary information.

These reforms signal that responsibility for good consumer outcomes runs right through the supply chain.

How will these reforms improve ASIC’s toolkit?

The new product governance regime recognises that further measures are needed to address market problems where a traditional disclosure approach is not working. The explanatory memorandum to the bill notes that:

‘disclosure can be ineffective for a number of reasons, including consumer disengagement, complexity of documents and products, behavioural biases, misaligned interests and low financial literacy. The availability of financial advice may not be sufficient to overcome these issues. A consumer may not seek financial advice or may receive poor-quality advice.

We consider these reforms to be an opportunity to complement disclosure as a regulatory tool. In many cases, disclosure is necessary but not sufficient to deliver optimal regulatory outcomes. The product governance regime will increase the accountability of issuers and distributors across the product life cycle and impose on firms greater responsibility for the design and targeted distribution of products. Taken together with the proposed product intervention power, these reforms will facilitate ASIC taking a broader regulatory approach to improve standards in the financial services sector, in the interests of consumers.

ASIC’s expectations on firms

The product governance regime underlines the importance of firms taking steps to create a culture that focuses on accountability for consumer outcomes.

If firms embrace the reforms to implement a robust product governance framework in their businesses, the result should be a financial services industry that is more customer-focused across the whole product lifecycle.

We think these reforms will help rebuild trust and confidence in the financial system as a whole.

If firms are slow to change, ASIC will be empowered to proactively deal with the problems that arise.

Material published in Governance Directions is copyright and may not be reproduced without permission. The views expressed therein are those of the author and not of Governance Institute of Australia. All views and opinions are provided as general commentary only and should not be relied upon in place of specific accounting, legal or other professional advice.

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