Identifying your target clients and designing solutions to their problems/needs does not sound like rocket science. Nor does having a robust process for testing and bringing them to market and ensuring they do what it says on the tin. Yet the FSA take the view in the final guidance on Retail Product Development and Governance* published in March that structured investment providers have to try harder as my old teacher used to say!
They highlight four main areas that firms need to look at.
- identify the target audience and then design products that meet the target audience’s needs, rather than merely contributing towards the firm’s bottom line;
- stress-test new products to ensure they are capable of delivering fair outcomes for the target audience;
- ensure a robust product approval process for new products – be clear about what is a ‘new’ product; and
- monitor the progress of a product through to the end of its life cycle.
Much of this is common sense and most industry participants will argue they do this already. Market practitioners appear to be split with some saying there is nothing new in the guidance and others suggesting that it will inhibit innovation.
A number of questions arise including amongst others:
How will target markets be determined and how often do clients need to be surveyed pre and post sale?
What tests can be used to determine future performance of a product, both quantitative and qualitative?
How can product development and governance be improved?
Who needs to have sufficient knowledge to approve new innovations?
How many “live” solutions will need to be tested and how often over their life span?
A further question is who does this guidance apply to? The implication is that it is the providers of structured retail deposits and investments. However, given that the FSA have a very broad definition of retail and no clear definition of a structured product, the new guidelines could potentially apply to retail banks, private banks and asset managers who re-badge or re-package those deposits and investments.
There is much work for firms to do before the FSA conduct their review of the review!
* FSA Final Guidance on Retail Product Development and Governance – Structured Product Review http://www.fsa.gov.uk/static/pubs/guidance/fg12-09.pdf