European Supervisory Authorities up the ante on consumer protection

14 February 2017

2017 should be the year when financial services firms put consumer protection at the heart of their operations and governance.  It makes good business sense, but if that’s not enough of an incentive then the fact that 2018 is going to be a bumper year for consumer protection regulations should provide additional incentive.  A number of new European laws, which are either wholly or partly aimed at improving consumer protection, will come into force in 2018.

Regulation Effective date
The Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation 1st January 2018
Markets in Financial Instruments Directive (MiFiD) II 3rd January 2018
The Insurance Distribution Directive (IDD) 23rd February 2018

It is highly unlikely that Brexit will have a significant impact on these, or the implementation dates, as much of this is driven by the UK which tends to take a lead in policy holder and investor protection.

Regulators have, for a long time, considered appropriate product oversight and governance arrangements to be one of the key ways to protect customers.  Getting it right means ensuring products meet the needs of the target market so as to reduce the risk of mis-selling: The consequences of which, as we know too well from the PPI experience, can have a huge financial and reputational impact at a firm level as well as industry wide.

A concerted cross-sector effort limits opportunities for regulatory arbitrage

To mitigate the risk of regulatory arbitrage, EIOPA, EBA and ESMA have each published regulatory requirements targeted at improving consumer protection in the insurance, banking or investment sectors respectively. These include guidelines or technical advice which provide additional implementation detail on the product governance requirements of the IDD and MiFiD II.  Firms are expected to prevent customer detriment or at least mitigate the risk of detriment as far as is possible. At a high level this requires firms, whether they are manufacturers or distributors, to manage conflicts of interest and take appropriate account of the characteristics and interests of the target customers of their products.   Ultimately responsibility for product oversight and governance arrangements sits with the board of directors of the firm.

The technical standards for the Key Information Document (KID) under the PRIIPS Regulation, in turn, are aimed at improving the investor understanding and enabling comparisons to be made between different packaged retail and insurance-based investment products in terms of the key features, risks, rewards and costs.

Last, but not least, there are new requirements around sales incentives and the remuneration of sales staff; including the EBA’s Guidelines on remuneration policies and practices related to the provision and sale of retail banking products and services. These aim to improve the alignment between remuneration, incentives and the fair treatment of consumers in order to mitigate the risk of mis-selling.

What does this mean for firms manufacturing and distributing insurance products?

EIOPA considers effective product oversight and governance arrangements to be a key way to mitigate the risk of mis-selling and ensuring that insurance products meet the needs of the target markets for which they are designed.  The product oversight and governance requirements of the IDD are seen as an essential component of achieving EIOPA’s consumer protection objectives.  EIOPA’s preparatory guidelines published last year set out in more detail what insurance manufacturers and distributors should be doing in preparation for implementation next year.

Manufacturers are expected to:

  • Establish, document and regularly review product oversight and governance arrangements;
  • The arrangements should be proportionate to the level of complexity and the risks related to the products and the manufacturers business;
  • Ensure that the personnel involved in designing products have the necessary skills, knowledge and expertise;
  • Implement suitable steps, as part of product governance arrangements, to identify appropriate target markets for products;
  • Carry out product testing, including scenario analysis, prior to bringing a product to market;
  • Monitor the product on an ongoing basis, post distribution, to ensure the product remains aligned with the interests and objectives of the target market;
  • Take remedial action, during the life-time of the product where the product gives rise to the risk of customer detriment;
  • Choose appropriate distribution channels; and
  • Retain full responsibility for compliance with product oversight arrangements when the product design is outsourced to a third party;

Product distributors are also in scope of the regulations and are expected to:

  • Establish, document and regularly review product distribution arrangements;
  • The arrangements should be proportionate to the level of complexity and the risks related to the products they intend to distribute and the business;
  • Obtain all necessary information on the product and the target market from the manufacturer;
  • Ensure the distribution strategy and target market are consistent with that intended by the manufacturer; and
  • Inform the manufacturer where sales information indicates there is a risk of customer detriment e.g. because there is misalignment between the product characteristics and the target market.

How Bovill can help

Whether you are a manufacturer or a distributor of retail financial services products our team of regulatory consultants can help you to review and implement the necessary changes to your product oversight and governance arrangements in preparation for meeting the new requirements.

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