27 September 2020
Good customer outcomes are premised on the right information, the right structures and the right controls being in place. In this post, we look at product names and the importance of being true to label.
“Ollie? James? Something Gaelic?”
“Nobody can spell or pronounce Gaelic names. And we don’t know that we’re having a boy.”
And on it went.
The last few months at home has been filled with conversations like this. Choosing a baby name is tough. Made tougher when one party is convinced it’s a boy and the other a girl. Watch this space. Not long to go.
So, it was interesting to see that we weren’t alone with our struggle. ASIC has had a well-publicised engagement with the funds management sector regarding names. Cash? Cash Plus? Short term? Balanced? Conservative? Though I’m sure the path to resolution for affected issuers will be quite a bit different to the resolution of our little family squabble!
We understand that ASIC began this review at the end of 2019 and was driven by concerns at the Regulator that investors could be exposed to misleading promotion when seeking better returns in a period of low interest rates and market volatility. ASIC found that some investment products in the market were being spruiked as ‘cash’ or ‘term deposit’ like but were, in fact, much higher risk products.
This action from ASIC and associated media statements have led to some interesting reflections at PX Partners. What initially appears to be a straightforward piece of regulatory action on product labelling has caused us to look deeper, at some more fundamental product governance questions.
Who decides the name?
Different organisations have different ways of approaching it. We know of one who made it a competition amongst employees at their office. Ultimately, the responsibility sits with the Board or governance authority who approves issuing of the disclosure document. The Due Diligence Committee plays a critical role. As does the Product Manager and Compliance team. But have we paid enough attention to naming in the past? And what about the passage of time? A fund name in 2000 may have been very much in vogue, in line with regulator and community expectations. But its 2020. We have had a Royal Commission in to misconduct in financial service. Times have changed. Have the labels moved with the times?
Does it matter?
It does. The funds industry relies on advisers, gatekeepers and Approved Product Lists (APLs) to help retail investors navigate their options.
Screening of funds and bucketing of investment options is a well-established practice in the funds industry in Australia. Those with responsibility for categorising different investment products pay more attention to what is ‘under the hood’ than simply relying on the label.
But, that being said, many retail investors do not rely on financial advisers and are choosing investment products themselves. ASIC has ‘called time’ on disclosure reliance with their research indicating that only 20 out of 100 people read disclosure documents. This means it is critically important for responsible product issuers to be transparent with their product labels.
What is required of product issuers?
The answer is the same to most questions faced by the industry – do the right thing, be transparent and care about your customer outcomes. In this case – if you’re not running a cash fund, then don’t call it a cash fund.
From the Regulator’s perspective, this matter goes to some fundamental obligations – are you being misleading and deceptive? Are you providing financial services efficiently, honestly and fairly?
What action is needed now?
This depends on the maturity of your product governance framework. If you have not started work on your firm’s response to the new design and distribution obligations yet, it is time!
Product governance is a broad framework which spans disclosure, labels, operations, customer outcomes, target market, distribution channels, marketing, investments, risk and everything in between. Management and Boards should be asking:
- Is our product lifecycle or governance framework documented? Is it clear where accountabilities lie?
- Is it broad and encompassing? Are product names reconsidered when offer documents are being updated? Do we have representation from across the business to ensure all views are heard?
- Do periodic product reviews check back to the original business case or intention of the product? Is the investment strategy of the product materially the same? Is it still being sold in line with how it was intended to be sold?
- Has the product take-up been in line with expectations? If not, is this because it isn’t meeting customer needs?
While Juliet might’ve argued that names should not matter, recent regulatory action serves as an important reminder that they do.
firstname.lastname@example.org would appreciate any (helpful!) baby name suggestions and would be happy to chat more about how PX Partners supports clients through regulatory change and interactions.