The FSI shares concerns raised by ASIC that consumers are buying products that do not match their needs. The existing regulatory framework relies heavily on disclosure, financial advice and financial literacy. However, disclosure can be ineffective for a number of reasons, such as complexity of documents and misaligned interests. The FSI also considers that current industry-led standards have not been sufficient by themselves to address serious conduct issues.
According to the FSI, product issuers and distributors are best placed to understand the features of a product and its appropriate target market. The FSI has therefore recommended introducing a principles-based regulatory obligation that would require product issuers and distributors to consider a range of factors when designing and distributing products and conducting post-sale review.
This includes taking into account the product’s intended risk/return profile, how consumers are affected by the product in different circumstances, implementing controls to ensure the issuer’s expectations for distribution are met and periodically reviewing whether the product still meets the needs of the target market. It means monitoring and overseeing a product throughout its life cycle – and having systems in place to enable such product governance to occur.
Product issuers have raised concerns that the proposed obligation would make determining the suitability of the products more difficult and impose additional compliance costs. However, the FSI has noted that the proposed obligation would lead to substantial benefits for consumers, which would outweigh the concerns of the industry. The FSI believes that if the product issuer has existing good practices, the new obligations would impose only minimal additional costs (an unusual suggestion given that the recommendation is founded on the belief that product issuers do not have good practices at present).
The Inquiry’s recommended approach is closely aligned with the regulatory regime already operating in the European Union and the UK. Recent research into the UK’s new product governance obligation suggests that the obligation is playing a positive role in focusing product issuers on consumer needs, although there is plenty of evidence of significant increases in compliance costs.
Similar to the UK and the EU, the Australian proposed framework is aimed at promoting the targeting of products to those consumers who would benefit from them. It represents a significant shift of burden from the consumer to product provider and will require a rethink of product development processes and a critical assessment of different distribution channels if the recommendation is implemented.