The Conduct of Financial Institutions (COFI) Bill will bring decisions about financial products and services, how they are marketed and explained, and the outcomes customers experience into a more closely connected conduct framework.
For financial services providers, this means compliance will increasingly need to be considered across the customer journey rather than as a series of separate obligations.
Chapters 5 and 6 of the Bill deal respectively with requirements relating to financial products and services, and with advertising and disclosure. Moonstone Compliance says the provisions reflect COFI’s broader shift away from a narrow focus on process compliance towards assessing whether financial institutions deliver fair customer outcomes in practice.
References in this article are to the 2020 draft version of the Bill, because the Bill that will be introduced in Parliament had not been published at the time of writing.
This is the second article in a series examining what COFI could mean for FSPs. The first article, “Preparing for COFI: ‘fair outcomes’ will be the new compliance test for FSPs”, looked at how the Bill is expected to change the regulatory approach to licensing, representatives, organisational culture and governance – and why having compliant policies and processes may not, on its own, be enough to demonstrate compliance in an outcomes-based framework.
Chapters 5 and 6 take that principle into the way financial products and services are designed, distributed, and monitored, as well as how they are presented and explained to customers.
Appropriateness starts before the advice process
One of the important shifts identified by Moonstone Compliance is that appropriateness under COFI extends beyond determining whether a financial product or service is suitable for an individual client at the point of advice.
Financial institutions must also consider whether products and services are appropriate for the broader groups of financial customers they are intended to reach.
This brings considerations about customer needs further into decisions about product and service design, target markets, and distribution.
Moonstone Compliance says FSPs will therefore need to be able to show that their broader service models align with customer needs, rather than relying only on evidence that individual customer interactions complied with the applicable requirements.
In effect, different parts of the customer journey become more closely connected. Who a product or service is intended for, how it reaches those customers, and how it is ultimately provided cannot necessarily be viewed as unrelated decisions.
COFI also introduces a lifecycle perspective. Products and services must be subject to appropriate governance and oversight, including competent design, formal approval of new or materially changed services, and ongoing monitoring.
Accountability extends beyond individual advisers to those involved in product development, governance and compliance functions, senior management, and, ultimately, the governing body.
For FSPs, this extends the focus beyond what happens when a product or service is first offered to a customer.
Connecting expectations with experience
The same connection becomes apparent when Chapters 5 and 6 are considered together.
Moonstone Compliance says COFI focuses not only on whether products and services are appropriate but also on whether they perform in line with the expectations created for customers through advertising, disclosure, advice, and other communications.
This places greater importance on consistency between what customers are told about a financial product or service and what they subsequently experience.
Chapter 6 requires marketing to be clear, fair, unambiguous, and not misleading, while disclosure must support informed decision-making throughout the product lifecycle.
In the case of advertising, the requirements extend beyond conventional advertisements to promotional activities more broadly. Communications must be appropriate for their target audience, and financial institutions must have suitable controls before they are published.
The institution also remains responsible for marketing conducted on its behalf by third parties.
Disclosure, meanwhile, is treated as an obligation that extends across the customer relationship rather than as a once-off event.
Customers must receive meaningful information at the appropriate stages about matters including risks, benefits, costs, obligations, contractual consequences, and avenues for recourse.
Moonstone Compliance points out that the emphasis is not merely on whether information has been provided. Disclosures must be clear, plain, timely, relevant and complete, taking account of factors such as the complexity of the product and the knowledge of the customers for whom it is intended.
The objective is to support genuine customer understanding and meaningful comparison.
This illustrates an important feature of COFI’s outcomes-based approach: product and service governance and customer communication do not operate independently of one another.
The way a financial product or service is marketed, disclosed, and explained helps to shape customer expectations. Those expectations, in turn, are relevant when considering whether the product or service performs in line with what customers were led to expect.
FSPs will need to look for signs of poor outcomes
The connection does not end once a customer has entered a financial arrangement.
Moonstone Compliance highlights COFI’s requirement for financial institutions to actively monitor products and services and identify material risks of unsuitability, underperformance, or unfair customer outcomes.
Where risks emerge, institutions are expected to take steps to address them before customer harm materialises.
This represents a more proactive approach to conduct risk. Rather than treating compliance principally as evidence that the required processes were followed at particular points in the customer journey, FSPs will need mechanisms for assessing whether products and services continue to produce appropriate outcomes.
The precise arrangements will necessarily differ according to the nature and scale of the business. COFI provides for proportionality, which is particularly relevant to smaller and owner-managed FSPs.
But Moonstone Compliance says even smaller businesses will need to be able to demonstrate who is accountable for key decisions, how those decisions are approved, and how fair customer outcomes are monitored in practice.
Accountability can also extend beyond activities performed directly by the FSP.
COFI adopts what Moonstone Compliance describes as a “look-through” approach, intended to ensure that retail customer protections continue to apply where services are provided indirectly, including through intermediaries, retirement funds, or distribution platforms.
Financial institutions will also have responsibilities relating to third-party advertising, disclosure, and other market communications. They will be expected to monitor relevant communications and address risks not only when they have actual knowledge of a problem, but also where they reasonably ought to have been aware of it.
Following the customer journey
For FSP owners considering how to prepare for COFI, Moonstone Compliance recommends reviewing how products and services are designed, approved, and monitored within the business.
Target markets should be clearly defined and documented, while marketing and disclosure should be assessed against the objective of genuine customer understanding.
FSPs should also consider whether their oversight arrangements clearly establish who is responsible for important decisions and how customer outcomes are tracked over time.
For smaller businesses, this does not necessarily mean creating complex new governance structures. The emphasis is on being able to demonstrate clear accountability and evidence of appropriate oversight.
The broader implication of Chapters 5 and 6 is that areas of an FSP’s business that may previously have been considered separately will increasingly need to be viewed as parts of the same customer journey.
How a product or service is designed affects who it is appropriate for. How it is marketed, disclosed, and explained shapes what customers understand and expect. And what happens after the customer enters the arrangement provides evidence of whether those expectations and the intended customer outcomes are being met.
Under an outcomes-based framework, the connections between those stages will matter increasingly as much as the compliance processes within each one.
