Investment News NZ, a service run by respected journalist David Chaplin, describes ASIC's new Design and Distribution Obligations (DDOs) as offering a bitter pre-taste of COFI" - referring to New Zealand's draft Financial Markets (Conduct of Institutions) Amendment Bill. Investment News quotes a range of sources in Australia as closing products rather than meeting the additional costs and risks of the new compliance obligations:
"ASIC lists three core obligations for the various parties involved in the financial product chain, requiring:
issuers to design products in synch with the “likely objectives, financial situation and needs” of targeted end consumers;
issuers and distributors to take “reasonable steps” to ensure products only reach the defined client market; and,
issuers to monitor “consumer outcomes” and review products in light of the DDO end game."
Only the most cynical and short-term thinking generates products that would breach the first obligation. Occasionally time can cause a product to drift from being an effective solution to being considerably less effective - and those products should, of course, be cut from any offered range. So on this point most product providers would agree with the regulator and also no incur any meaningful marginal cost if they already have a professional product management function.
But it is a rare piece of new law or regulation which comes with no trade-offs. Costs begin to emerge when you consider the possibilities under the second two obligations. A product provider could offer a product to distributors and consumers with little concern for how they used it. In practice most still preferred to offer more warnings and guidance the more exotic or risky a product became. A few did not, or were happy to play down risks. It seems that in every market cycle in the investment sector this occurs. In life and health insurance we have always known that a few (we hope, very few) clients, have treated insurance as a kind of lotto ticket. In some cases a rare 'bad apple' adviser has not tried to dissuade them much, of if they have tried, the client has simply bought online or direct.The tricky part is in knowing what 'reasonable steps' are under new regulations and how to meet them. Costs are inevitably added. Some rarely used, yet useful, products will be deemed too difficult or too risky to use.
The toughest - and perhaps the costliest - rule is to monitor consumer outcomes. This requires a lot of thought about what represents a good outcome, how the product supports that, and monitoring which may (although it does not have to) inject insurer compliance requirements deeper into intermediated adviser-client processes such as annual reviews. How frequently and how carefully this has to be done could describe a big range of possible outcomes. Different companies will take different approaches. Clients may balk at some of them - it seems inevitable that some advisers will. There is a risk that some adviser - client processes are so defined by compliance that differentiation becomes impossible. Worse, clients may simply shrug and walk away from more complex products and advised engagements in favour of less effective, direct, engagements. We believe that advice can make a difference. The more complex a client's situation the bigger that difference can be.
The crucial lesson from this point is not to try and avoid the requirements but for all parties - insurers, advisers, and regulators, especially regulators, to engage creatively, flexibly, and with an open mind on compliance technology, to try to reduce the costs and maximise the benefits. We all say we will, but it does take real effort not to slip into dreary functional norms.