Product design – rethinking financial consumer protection

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Designing a financial product so that it meets the needs of its intended consumers should be a key goal of any financial service provider. However, should it be a legal obligation? Increasingly, authorities around the world that regulate retail banking products seem to think so. As a result, they have started to introduce new kinds of legal requirements that govern how these products should be designed and distributed. The long-term objective is to encourage trust and fair treatment in the financial system.

By ‘retail banking products’ we mean deposit, credit, and payment products, regardless of whether they are offered by a bank or any other kind of provider. Products of this type are frequently a consumer’s first acquisition, when they may have the least experience in choosing or using a financial product.

Until recently, regulation of financial product design tended to focus on sectors beyond banking, such as investment products and insurance. However, policy makers are recognizing that while traditional financial consumer protection approaches (for example, disclosure obligations) are still important, they can be insufficient in protecting consumers of retail banking products.  New or changing risks, including due to product and market innovation, also increase the challenges that regulators face in anticipating potential consumer harms.

What are some emerging trends?

A new Discussion Note released by the World Bank – Product Design and Distribution: Emerging Regulatory Approaches for Retail Banking Products – discusses product design rules for retail banking products recently introduced or proposed in several jurisdictions. They include Australia, the European Union, Hong Kong, South Africa, and the United Kingdom. Drawing from the case studies, and international commentary, the Discussion Note highlights emerging approaches to regulate product design and distribution, including:

  • Policy aims: The main focus is on requiring financial service providers to have internal oversight and governance arrangements designed to ensure products meet the needs of consumers in a target market. The target market generally refers to the consumers for whom a product is intended.
  • Governance arrangements: A core requirement is to establish and implement clear, documented product oversight and governance arrangements.
  • Target market assessments: A central requirement is to undertake an assessment of the target market when a product is being developed and to review it from time to time.
  • Distribution requirements: Distribution channels and distributors must be appropriate for consumers in the target market. Product manufacturers and issuers must screen and monitor their distributors, as well as appropriately inform them. Distributors must in turn distribute a product consistently with the target market assessment and with instructions from the manufacturer or issuer.

Do the rules apply equally to all products?

Some regimes apply to all or most retail banking products, while others apply only to limited types. Rules are generally confined to products offered to a consumer – typically individuals, sometimes also small businesses – or its equivalent concept in a jurisdiction.

Importantly, while the rules can be applied to all retail banking products, no matter how simple or complex, their application should follow a proportionate approach. The trend is for product design and distribution rules to be flexible enough to take into account the complexity and risk of the product as well as the nature, scale, and complexity of the provider’s business.

What if things still go wrong? How could a regulator intervene?

Some jurisdictions have given regulators ‘product intervention’ powers.  They can be used to impose restrictions on the marketing, distribution, or sale of products. A prerequisite is evidence that a financial product has caused, or may cause, significant detriment to consumers that cannot be remedied in another way. 

What next?

Product design and distribution is an emerging area of focus for regulators. Research in several key areas could assist in the development of effective approaches. Possible future research areas include guidance from and to regulators; analysis of target markets; and assessments of the impact of the new rules.

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