The new EBA Guidelines on Product Oversight and Governance (POG) will come into force in January 2017. This leaves banks with just over a year to implement effective processes governing design, target market and distribution channels for all products coming into market from January next year. Payments are likely to take the worst hit as the new rules demand product perfection from every angle.
The POG Guidelines require European retail finance providers to prove that new products are suitable for the customer, and to maintain these standards throughout the product lifecycle. Providers will need to define a suitable target market for new products in terms of specific customers as well as suitable distribution channels. Products will need to be tested in all prospective markets prior to launch. Furthermore, providers will be required to define a set of remedial actions that prevent sales to unintended audiences, mitigate the situation, and avoid re-occurrence.
The new rules apply to credit, payment, account and electronic money products, differentiating clearly between payment accounts, services, instruments and other means of payment. Taking into account that the Guidelines only apply to new products and the fast developments within payments, it is looking increasingly likely that the payments space will be affected by the new regulation, potentially restricting innovation.
To cope with the new regulation payments/retail banking providers have to answer a set of constitutional questions such as:
To answer these questions, the POG Guidelines need to be understood in the context of the Payment Service Directive 2 (PSD2), which comes into force in January 2018. The biggest change - and challenge - for providers will be to determine the appropriateness of new products for the customer. The absorption of MiFID II into local laws has given regulators in some jurisdictions the option to take investment products off the market if they appeared unsuitable for the customer (e.g. Kleinanlegerschutzgesetz - Small Investor Protection Act - in Germany). Suitability will become crucial for the success or even marketability of new products under POG.
With new payment products appearing regularly in the market, the POG Guidelines are likely to create waves and impact providers that are developing new payment instruments - both bank and non-bank. POG can even result in a huge hit to the provider’s business models if the customer value and appropriateness are questionable and products are not approved for sale to a wide audience.
To comply with the POG Guidelines, retail banking and payment product providers and distributors need a sound knowledge of the target markets, providing support to product manufacturers where appropriate, and have their own POG arrangements as part of an internal control system.
Efficient strategic product governance and oversight will not only determine whether a product is released into the market or not. It will also affect the market position of the product provider, producer or affiliated distributor.
For movers and shakers in the payments world POG means uncertainty, potentially limiting the growth of payment products because of the additional efforts required to demonstrate customer benefits and suitability. New payment products often come with unknown data security risk for the customer and limited benefits for at least some parts of a given market. Many of these products will fail unless the combination of suitability and distribution channel is justified fully.
From product specification and target market definition, to distribution channels and terms and conditions of sale, a strategic and well-informed approach will determine the market acceptance and success of new payments and other retail banking offerings. Manufacturers and distributors of retail banking products should begin assessing the impact of POG on their business, making the most of the time left before January 2017.
Rolf Enders is a Senior Consultant with Capco’s Finance, Risk & Compliance domain. He has significant business-process knowledge in all areas of banking, as well as significant consulting experience. Rolf has particular expertise in Product Oversight and Governance, Risk Management, Finance business process and accounting, Compliance and process optimization.
The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.