In July, the International Financial Consumer Protection Organisation ("FinCoNet") (see our previous FinCoNet blog post here) issued its long-awaited report, Financial Product Governance and Culture (the "Report"). The 99 page Report provides an overview of policy developments and oversight tools used by participating jurisdictions and draws an important link between healthy organizational culture and good product governance. It is based on 29 responses (two from Canada)1 received from 25 countries and highlights a number of case studies.
The Report elaborates findings in the following areas:
- Regulatory frameworks
- Tools for good consumer outcomes
- Risks to consumers
- Consumer complaints
- Supervisory tools and
- Impacts of organizational culture
Product governance is defined in the Report as the systems (including controls and distribution channels) that have been put in place to embed consumer needs considerations into the product lifecycle.
Results show that all but a few respondents (11%) require firms to implement measures that ensure suitable banking products are offered to consumers and related risks are assessed to avoid the potential for consumer harm. And, jurisdictions where legislation covers product governance tend to have both proactive (e.g. product testing) and reactive (product intervention powers) supervisory approaches.
Tools For Good Consumer Outcomes
The Report reveals that rules related to product governance are meant to assist consumers in their product purchase choices by imposing specific product design and distribution obligations to ensure suitability. Suitability and other favorable consumer outcomes can be achieved, according to its findings, through the identification of target markets.
Further, internal product approval processes and product testing and monitoring measures are also used as tools to achieve good consumer outcomes, as are the oversight of third parties2, sales incentives, distribution channels3 and the use cooling off periods.
Risks To Consumers
The Report highlights the consumer risks linked to poor product design and inappropriate product distribution. The riskiest products reported involve mortgages, unsecured personal loans and credit cards, followed by short-term high-cost credit, deposit products, secured auto loans and finally, payment products. Generally, the risks associated with credit products consist of over-indebtedness, market-related risks and a lack of consumer understanding.
Payment products, on the other hand, are more likely to present fraud, processing and cyber risks, and benefit from testing and market targeting to mitigate those risks. The risks related to deposit accounts typically result from a lack of transparency regarding fees, mis-selling and improper product design, all of which are minimized, according to the Report, by legislation and increased financial literacy.
The Report points to complaints information as an important tool in determining whether financial products, in the jurisdictions surveyed, are delivering the outcomes required by their respective country's product governance rules. It further states that complaints data serve as an impetus in identifying systemic issues with financial product design and for reforming banking practices.
The availability of external dispute resolution mechanisms and reporting requirements related to product governance are also viewed as significant and necessary components of strong product governance frameworks.
According to the Report, supervisory authorities should also collect and analyze complaints information to help improve their ability to identify consumer risk, regulatory gaps and systemic irregularities, to assess the effectiveness of regulatory measures and to measure compliance with law and regulations.
92% of responding jurisdictions indicated having the requisite powers to enforce product governance obligations, while 90% reported having powers to impose sanctions. In addition, enforcement actions typically result from information gleaned directly from complaints or from the analysis of their aggregate data. A risk-based approach to supervising product governance is the typical approach used by the responding regulatory authorities.
Approximately 75% of respondents are reported to have product intervention powers, which means that they can intervene in the sale or prohibit the sale of a product or channel or ban a product from the market altogether. The Report argues that product intervention provides financial system stability, market integrity and mitigates potential risks.
To mitigate the risk of mis-selling, most jurisdictions (79%) have additional and complementary measures to their product governance oversight activities. These measures include codes of conduct, self-regulatory arrangements, complaints handling regimes, firms' internal controls and financial literacy programs.4
Impact of Organizational Culture
The Report refers to Canada5 as being the only jurisdiction where "good culture" is defined6. It goes on to mention that many of the responding authorities view culture as being within the responsibility of firms to have appropriate risk management frameworks in place to ensure that employees behave in the interest of consumers and of society at large.
Some jurisdictions7 indicated having developed formal approaches to assess "good culture" (e.g. needs and risk assessments, staff training, adequate disclosure, product impact assessments, etc.) in product design and development processes. Others8, however, only provide, as part of their responses, anecdotal examples of "good culture" in product design.
Moreover, according to the Report's findings, the most common drivers of "poor culture" in product design and governance are identified as a firm's lack of focus on its customers' needs, the prioritization of sales targets, misaligned incentives and compensation programs and poor leadership. And when "poor culture" is identified, responding authorities referenced imposing punitive sanctions, providing redress to consumers, disciplining employees and prohibiting the further distribution of product as examples of measures taken.
The Report concludes by asserting that product governance and culture should continue to be an important area of focus to policy makers and regulatory authorities to promote customer-centricity in firm decision-making and to avoid consumer harm. It expects the challenges ahead to involve the increasing complexity of financial products, the pace of technological innovation and organizational culture.
It described a "good culture" as one where firms have formally implemented product governance frameworks that consider consumer needs and target markets in the design and distribution of their products and that include formal approval processes.
1 Financial Consumer Agency of Canada ("FCAC") and l'Autorité des marchés financiers du Québec ("AMF").
2 The Report includes a specific reference to Canada in this regard. Presumably, this is a reference to section 459.5 of the Bank Act.
3 The AMF requires intermediaries to meet expectations on marketing and distribution, including training sales staff, developing outsourcing agreements which are not detrimental to customers and properly assessing distribution methods. The Report concludes that product governance is typically applicable to all distribution channels, although critically in some jurisdictions, it mentions, product governance requirements are not applicable to newer electronic distribution channels. Moreover, the Report suggest that in a context of accelerated digital innovation, emerging distribution channels should be an area of focus for policy makers.
4 The Report mentions that the FCAC's has undertaken a series of educational initiatives aimed at consumers to highlight the features of financial and banking products and that it monitors banking products and culture within financial institutions by publishing reports and notifying them of breaches or imposing sanctions where it deems appropriate.
6 "The common values and standards that define a business and influence its mind-set, conduct and the actions of its entire staff. A good corporate culture is therefore essential to the viability of a financial institution, which fundamentally depends on the confidence of consumers. Conversely, a culture that has deficiencies can cause serious harm and damage an institution's reputation to the point where its viability is jeopardised." (AMF definition)
7 AMF and the Netherlands.
8 Brazil, Israel and Japan.
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