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Draft Guidelines on product oversight and governance arrangements for retail banking products (“POG”) shall capture both manufacturing and distribution domains.
The major concern related to the POG is the services (products) which the POG are envisaged to capture. The POG tend to be adequate to credit agreements and deposits. At the same time they seem hardly adequate to other products listed in the section 4.1.3 of the POG. More general, the POG respond properly to challenges raised by products, where time is a factor that impacts substantially the performance of the product and of the consumer including risks and benefits. The challenges to which the POG respond are hardly visible in the products where the consumer indeed enters into long- term contract (framework contract), but the real product is the individual transactions under the umbrella contract (payment account, payment services, payment instruments, e-money). It is highly unlikely that those products are substantially inappropriate for interests, objectives and characteristics of any specific target market (e.g. simple services for paying utility bills). Application of some of the GL to those products is expected to be particularly challenging including product testing (GL4.1), negative target market (GL3.5), assessment of the target market’s financial capability (GL 3.6). Compliance with those GL will be mostly paper work without inherent value. The POG require reconsideration and preferably limitation to savings and credit products.
GL are extremely scarce with respect to the approach expected from the institutions when identifying target market. Outside the POG the defining of the target market is a matter of business responsibility. In case wrong target market is identified the result is the business inefficiency and this is the only sanction (business failure). Once the POG are applicable the target market becomes a matter of regulatory compliance (non-compliance) with far reaching sanctions. In absence of indications what the target market is the POG may bring unexpected result that each business failure may be considered non- compliance under the POG. Such outcome is by no means justifiable under the POG objectives. It is thus essential that the POG provide indications clarifying how the target market shall be understood across markets and jurisdictions, including indicative list of factors which impact target market delimitation and their hierarchy. This action clarifies at the same time the concerns about the negative target market in light of the prohibition to offer products outside the target market. At the same time explicit guidance on some essential questions is needed. This includes whether in case of simple services the target market may be “all consumers” or whether if a consumer from outside the target market insists on obtaining the product the consumer must be refused the product or the provider can enter into a contract with the consumer though.
GL seem to assume that all the distributors have in place formal general systems and controls, at least internal control resources and facilities which the product oversight and governance arrangement required under the POG might be integrated into. It is not unlikely that the simple products captured by the POG are distributed by entities, which are by no means subject to the requirement of having in place formal general systems and controls. It is essential that the POG clarify whether the intention behind the POG is that all distributors of products are required to implement formal general systems and controls (including risk management and internal control) even if such requirement had not been provided for in the CRR, MCD, PSD, EMD. Accordingly it is essential that the POG explicitly confirm, that where the distributor is neither a credit institution nor creditor, payment institution, electronic money institution the obligations addressed to the distributors are understood that the manufacturer is required to ensure that the distributor acts in line with the POG and the non-compliance may be enforced by the authorities only against the manufacturer (no powers of the authorities directly against those distributors).
It is absolutely essential that the POG clarify whether under the POG the manufacturer or the distributor is required to disclose information exceeding the scope of information required by the legislation applicable to the product.