In July 2021, the International Financial Consumer Protection Organisation (“FinCoNet”)and the G20/OECD Task Force on Financial Consumer Protection published its long-awaited report, Financial Product Governance and Culture (the “Report”) in relation to financial products, including banking products, based on 29 responses collected from 25 participating countries.
Culture is defined as “the shared values and norms that drive behaviours and decision making within the [financial services] organisation”. The Report identifies a strong link between “good organisational culture and product governance”.
The Report includes findings on areas such as, regulatory frameworks, tools for good consumer outcomes, risks to consumers, consumer complaints, supervisory tools and impacts of organizational culture, some of which are summarized hereunder.
The Report outlined that most respondents implemented rules and processes ,to ensure the fair treatment of consumers; most product governance requirements being specifically focused on banking products.
Highlights of the report:
89% of respondents have established product governance rules for products, generally and for banking products specifically
65% of respondents have provisions for a target market, relating to the consumer or factors relating to the product. Consumer factors include demography, financial capacity, occupation, risk aversion, financial knowledge potential vulnerability. Product factors refer to product risk level or the product complexity level.
81% of respondents hold third-party providers responsible for breaches of design and distribution obligations
80% of respondents have product governance requirements that address sales incentives
Most respondents reported that their product governance requirements are “designed to produce good consumer outcomes”. These include suitability, choice, safety, fairness, and purpose.
Multiple risks arise from poor product design and inappropriate product distribution.
For credit products, risks include over-indebtedness, improper product design, inadequate sales practices and poor marketing and limited consumer understanding.
For deposit products, risks include lack of transparency about conditions and fees, mis-selling of deposit accounts and investment products, aggressive sales, poor product design, and fraud and depository institution failure.
For payment products, risks include fraud (unauthorised payments, scams ,identity theft and/or data breaches) and payments processing (risk of incorrect payments, service outages making it impossible to send, receive or access money, delays in payment processing and cyberattacks).
This is especially challenging for vulnerable populations such as older consumers. Yet, only 19% of respondents have product governance requirements that address banking products sold to older consumers.
Consumer complaints contribute to product governance by helping providers “identify failures” in products and allow supervisors to identify risks to financial consumer protection. 88% of respondents attest that these complaints play a role in financial product governance. Next, a dispute resolution process provides an alternative the opportunity to resolve complaints and subsequently “refine product governance requirements and assess whether consumers are being treated fairly”.
The Report indicated that supervisory authorities should also collect and analyze complaints information to help them better identify consumer risk, regulatory gaps and systemic irregularities, and measure the effectiveness of regulatory policies as well as the level of compliance with law and regulations.
The Report states that Canada is the only jurisdiction where “good culture” is defined.
Culture has been observed as a driver for good and bad governance. A poor product design can stem from poor culture such as failure to incorporate multiple perspectives, or to highlight product risks and concerns. Good culture focuses on consumer needs and delivering suitable products in a fair and transparent manner. A variety of regulatory and supervisory approaches have been used to foster good culture.
Good culture is viewed as a way to “achieve consumer focused decision making” by taking into account the needs, interests, objectives and characteristics of consumers. This in turn builds confidence in financial firms and their products.