Launching a new financial product in 2025? Don’t forget to do these things…

Launching a new financial product has never been easy, but today, the list of factors you need to take into account makes it a more complex exercise than ever before.

Wind the clock back to before October 2021 and it was a simpler time in product development.  And I’m not referring to standing around the white board with yellow sticky notes, negotiating with the newly appointed Scrum Master in an Agile environment.  Thankfully.

Whether you’re a fund manager working on a fund launch, or a cross-border payments business looking to issue a new non-cash payment facility, launching a new product today is trickier than it’s ever been.

It wasn’t too long ago that fund managers would develop new products, based on adviser demand, with an assumption that investor demand would follow – otherwise known as the Build it and they will come model.  Sometimes those investors would follow and sometimes they wouldn’t.

From a regulatory perspective (or any perspective really), developing a financial product, solely because advisers have asked for it, was never a sensible model.  Apart from being an expensive exercise when the product doesn’t quite take off, this kind of approach doesn’t sit well with the design and distribution laws.

Design and distribution laws

The product design and distribution obligations (‘DDO’) regime, which commenced in October 2021, introduced a new approach to regulation.  This regime has moved away from relying on disclosure as the main form of consumer protection and has introduced new measures to ensure that products are designed and distributed with consumers in mind.

The design and distribution principles need to be at the forefront of your considerations, from the design stage, through to the time at which your clients apply for your product and then throughout the course of the life of that product.
Apart from the benefits of designing products that are appropriate for your client base, you will probably be aware that ASIC has issued close to a hundred, largely high-profile stop orders to financial services licensees, using its new(ish) powers, where it has concerns in relation to DDO compliance.

Stop orders aside, in July 2024, the Federal Court ordered credit card issuer Amex to pay penalties of $8 million for breaches of DDO laws.  Amex, was found to have breached DDO laws between 25 May 2022 and 5 July 2022 because it, amongst other things:

• should have known that its TMDs were no longer appropriate due to high rates of cancelled applications; and
• failed to stop issuing credit cards when it had not reviewed the TMDs.

In his judgment, Justice Jackman emphasised the importance of reviewing circumstances and events to ensure that TMDs remain appropriate.  In particular, Justice Jackman said:
In addition to an obligation to identify an appropriate target market within a TMD, inherent in this consumer-centric approach is a requirement for financial product issuers and distributors to actively review events and circumstances that may suggest that an existing TMD is no longer appropriate.

Actively monitoring cancelled applications is probably not something that you had on your radar, prior to the commencement of the DDO regime and may not explicitly feature on your list of to dos even now.  But it’s one of a long list of considerations that you should now take into account for the purpose of ensuring that you comply with DDO laws.
There are many others.  You’ll need to ensure that:

• your TMD is and remains appropriate, and meets all of the technical requirements;
• your onboarding process and the reasonable steps you take to ensure that your clients are in the target market, are in fact reasonable. In doing so, you’ll need to ensure that the objectives, financial situation needs of a class of consumers are consistent with your product, amongst other things; and
• you monitor and review your arrangements and your client base on an ongoing basis.

Apart from meeting the technical requirements described above in relation to TMDs and meeting your reasonable steps obligations, you really need to demonstrate that the systems, processes and procedures that you have in place across the lifecycle of financial products remains adequate.  These are what ASIC refers to as product governance arrangements.

Product governance arrangements

You won’t find a reference to what product governance arrangements are in the legislation.  That’s because the concept of product governance arrangements originates from ASIC’s guidance on how to comply with the DDO, as set out in ASIC’s RG 274 Product Design and Distribution Obligations.

However, from a practical perspective, what does this mean?

There are no set requirements for the purpose of ensuring your product governance arrangements are adequate, and this will differ based on your firm’s specific circumstances.

In our view, your product governance arrangements should address who within your organisation is responsible for performing the relevant DDO-related functions, and who is accountable for these functions.

For example, if you’re a product issuer, you really need to consider:

• Who is responsible for product design?  Who are the members of your Product team who are responsible for product design?
• Who is responsible for the approval of product design?  (e.g. the Board, a delegation of the Board (if permitted from a regulatory perspective based on the financial products in question), investment committees, compliance committees, senior management, including your Head of Product (or equivalent) or a combination of these stakeholders)?
• For investment products – knowledge and expertise in relation to the relevant underlying assets (e.g. Australian equities in relation to a registered managed investment scheme that invests in such Australian equities).
• Determining what the reasonable steps in relation to distribution are and, separately, taking those steps.
• Who is responsible for Product-related business and operational risk management?  (Is your Product team responsible for this or is this managed by a centralised Risk team?)
• Who are the relevant stakeholders who are responsible for product disclosure?
• Breach and reportable situation reporting.
• Product administration and operational functions in relation to the product.
• Complaints handling (including your existing complaints policy).
• Conflicts of interest.

Take the time to design your product carefully and thoughtfully

You may have a very firm mandate (or directive) to forge ahead and make your product launch happen on an urgent basis, but regardless of your timeframe, you should really spend some time to set out how your product will function.

As a product issuer, you should really consider how the following aspects of product design are addressed.

Product specifications

Typically, we’d expect to find a product specification document that is maintained by your Product team and which sets out all of the specifications, functions, characteristics, limitations and the legal basis upon which your financial products are to be issued and how they are to be distributed.  We would expect such a document would be reviewed and approved by all relevant stakeholders within your business.  For example, those stakeholders may include Product, Business Operations, Legal and Compliance, Tax, Finance, etc.  If you’re running a smaller operation, where the relevant individuals wear several hats, then don’t get hung up on titles but make sure the right stakeholders are involved.

The product spec is a document that you should keep updated and keep testing as your product evolves.  This avoids “product creep” where you don’t keep track of incremental changes to your product, that may affect its regulatory standing.  Product specs are not prescribed DDO-related documents and certainly pre-date the DDO regime, but they’re a sensible way of documenting all of the above considerations.

Issues log

We also recommend that you maintain an “issues log” during the product development phase.  Maintaining an issues log is a sensible way to keep track of issues as they arise and then resolving them.  Just like product specs, issues logs are not prescribed, DDO-related documents, but we recommend that you maintain one, given the obvious benefits.

Approval of product design

Board papers noting your product approvals (i.e. papers written by Management and submitted to the Board for the Board’s consideration) are essential from a product governance perspective.  Board minutes evidencing Board approvals are also essential.  Where permitted by law, and where appropriate (depending on the type of financial product), some of these functions can be performed by a sub-committee/delegation of the Board.

Other relevant documentation and measures to put in place

We also recommend that you attend to the following:

• maintain meaningful and appropriate compliance policies, including in relation to complaints handling and conflicts of interest;
• ongoing review of the TMD, and ongoing periodic review of the relevant financial products.  Board papers (i.e. papers written by Management and submitted to the Board for the Board’s consideration regarding the establishment of the financial products, assessment of their ongoing performance, and any review of the TMD, etc.), legal advice and Board minutes evidencing Board approvals, are essential.  Some of these functions can be performed by a sub-committee/delegation of the Board;
• ensure that systems, documentation and reporting functionality that has been implemented for the purpose of receiving prescribed reporting from distributors (e.g. complaint and significant dealings data) is functioning correctly.

The above list is not intended to be a prescriptive list of things you should consider, but it is intended to get you thinking about your new product launch and your existing arrangements.

Of course, setting up a product is not just about DDO.  You’ll need to set up relationships with key service providers, negotiate your commercial arrangements, make sure you have the right staff and systems to support your new offer, and you’ll also need to perform rigorous testing.

When it does come to DDO though, we’ve developed templates for both product issuers and distributors for our HN Hub subscribers, who also have access to around 250 other policies, procedures and ongoing training tools.

Get in touch with our expert team or take a look at our specially tailored documents!

Author: Michael Mavromatis