AFS Compliance Officers Forum

1
AFS Compliance Officers Forum
Working with FSA Product Design Principles
Conolly Tunnard FCA Consultant 2 November 2007
2
Regulatory requirements during product design

• Product meets FSA required Outcomes.
• Product complies with Principles and Rules.
• Product is Treating Customers Fairly (TCF).

3
The Six Outcomes
These have been widely published in the last 18
months and performance will be judged against
them. Any product in its design and use must meet
the regulatory outcomes required by the FSA

• Consumers can be confident they are dealing with
  firms where the fair treatment of customers is
  central to the corporate culture.
• They will be investing in a product that is fair.

4
The Six Outcomes (cont.)

• Products marketed and sold in the retail market
  are designed to meet the needs of identified
  consumer groups and are marketed accordingly.
• They will be investing in a product designed for
  their needs.
• Consumers are supplied with clear information and
  are kept appropriately informed before, during,
  and after the sale.
• They will be able to understand what they have
  invested in.
• Where consumers receive advice, that advice is
  suitable and takes into account their
  circumstances.
• They are advised on products that suit them.

5
The Six Outcomes (cont.)

• Consumers are provided with products that perform
  as firms have led them to expect.
• The expectations that they have been given are
  reasonably likely to be met.
• Consumers do not face unreasonable post sale
  barriers.
• Firm is administered in a TCF manner.

6
How do you design a product to meet the above
outcomes?
Need to take into account the following

• FSA Principles especially 6 and 7.
• Rulebook.
• FSA views on TCF.
• FSA views on producer distributor relationship.
• FSA views on distribution (RDR).
• FSA views on promotional material (KFD).
• FSA views on systems and controls.

7
Principle 6
A firm must pay due regard to the interest of its
customers and treat them fairly. In relationship
to product design

• Must understand your membership and what they
  want.
• Must understand the markets appetite for risk.
• Understand who your distributor IFAs are selling
  products to.
• Do your research.
• Match the product to the market place.
• Monitor and control who product is getting to.
• Product meets the FSA required Outcomes.

8
Principle 7
A firm must pay due regard to the information
needs of its clients and communicate information
to them in a way which is clear, fair, and not
misleading.

• Information must be understandable, not to
  technical avoid jargon.
• Information must be aimed at target market.
• Must be concise as possible.
• Must be timely.

9
Rulebook

• COBS is far less prescriptive.
• As far as product development is concerned.
• COBS 4, 5 and 13 are important.

10
FSA views on TCF

• Treating Customers Fairly Culture.
• Treating Customers Fairly - a guide to management
  information.
• Management information package in place by 31
  March 2008.
• Societies must be TCF by 31 December 2008.

In July 2007, FSA published two Papers on TCF.
11
Treating Customers Fairly - Cultural

• Leadership - Senior Management must control
  product development and approve new product.
• Strategy - Must set process and approve systems
  and controls for developing product.
• Decision Making - Senior Management must be
  involved in and own all major decisions.

(In context of product development.)
12
Treating Customers Fairly - Cultural (cont.)

• Controls - Must over see development of controls
  and ensure their functionality.
• Recruitment - Must make sure right skill sets
  involved and enough staff to administer product
  who are adequately trained.
• Reward Strategy - This must avoid misselling
  temptations.

13
Treating Customers Fairly - Management
Information
Management Information (MI) needs to monitor TCF
behaviours. MI pack

• Appropriate MI must be made available to Senior
  Management.
• Must be adequate for Senior Management to judge
  if acting in TCF manner.
• Must be accurate, timely, relevant, and
  consistent.
• Must be standards for TCF which MI is measured
  against.
• MI leads to corrective actions taken by Senior
  Management.

14
What are the FSA expectations on TCF?
FSA to follow-up recent questionnaire with visits
when they deem it appropriate. What might they
want to see?

• Gap analysis and action plan.
• Internal communications and training.
• Customer communications.
• Compliance audit reports.
• Remuneration policy.
• Staff objectives.
• Management Committee information pack.

15
FSA views on Producer Distributor relationships
(PS07/11)

• Are products suitable for distribution channel
  and target market?
• Do distributors understand product?
• Is communication with consumers correct?
• Are advice channels correct?
• Are post sales requirements in place (eg
  breakpoints etc)?

16
Impact of Retail Distribution Review (RDR)

• RDR is the next monster behind (not far) TCF.
• Will impact on relationship with distributors.
• Will impact heavily on societies as producers.

17
Impact of RDR

• Need to understand how sales channels are
  reconfiguring.
• Are products still suitable?
• Are sales channels still suitable?
• Possibly easier for those selling to defined
  membership, than through IFA.

18
Impact of RDR (cont.)

• Fee / customer agreed remuneration will demand
  system upgrades. Commission will largely go.
• Legacy systems will not cope.
• Investment in systems will be required.

19
FSA views on state of KFD

• Published on 28 September 2007.
• Good and poor practices in Key Features Document
• 85 of KFDs not up to TCF standard.
• Some of your documents may have failed.
• Lack of clarity and information.
• Not appropriate for target market.
• Use of jargon.
• Not fair, clear and not misleading.
• Societies should review their literature.
• Regulatory material not as prominent as other
  marketing material.
• FSA have promised to revisit this issue and carry
  out further survey.

20
Systems and Controls

• Need product specification
• Lays down parameters of product.
• Why product is needed.
• Target market
• Distribution channel.

Must have documented processes and procedures for
product development
21
Systems and Controls (cont.)

• Systems and Controls
• Administration system.
• TCF management information.
• Benchmark to measure TCF MI against expected
  outcomes. What are likely returns?

22
See more at www.oacplc.com
23
AFS Compliance Officers Forum
Working with FSA Product Design Principles
Conolly Tunnard FCA Consultant 2 November 2007