Risk-scores Are Critical Under New Product Design Rules

Risk-scores are becoming critical to ensuring the sale of suitable financial products to investors, as Australia introduces new product design and distribution rules that echo the PROD rules in effect in the United Kingdom.
 
Risk-scores come into the spotlight because the product design rules (PROD) are suitability-focused. This means that product issuers must define target markets for a product and makes sure that most sales occur only to that nominated target market. Matching the level of risk inherent in a financial product with the risk-profile of the investor is core, critical component of the product design and distribution rules.
 
In the UK, more than fifty fund-managers have already mapped their retail managed offerings to risk-scores from the FinaMetrica Profiler. This was happening even before the PROD requirements emerged, as the FinaMetrica methodology for mapping an investor's risk-score to asset allocations was very useful to advisers wanting to ensure they had their risk-matching right. Now, with PROD, this level of extra care has become mandatory.
 
However, the UK journey down the PROD road has only just begun and, for some, it's a bumpy ride! Financial advisers also have responsibilities under these rules. They must segment their client-base to ensure that each segment is only offered products that are suitable for them — and select and provide a range of products suitable for each segment. It is a lot of extra work, at a time when UK advisers are still bedding down MiFID II suitability rules and the Senior Manager & Certification Regime requirements.
 
The new Australian laws closely follow the PROD rules, giving it the chance to learn from the UK experience.
 
The first lesson is that product-issuers and advisers need to be on the front-foot to deal with the work of segmenting clients and products. Once it's done, it's done. But getting the work finished can end up taking much longer than anticipated, as many firms in the UK have found.
 
Australia has a two-year transition to allow firms to prepare for the new product design and distribution rules, meaning they will commence in April 2021.

Posted: 1/06/2019 12:00:00 AM by PlanPlus Global