DDO Implementation – Learning lessons from MiFID II - Assurance & Advisory blog | Deloitte Australia has been saved
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With the Design and Distribution Obligations (DDO) requirements due to come into effect in a little over 18 months, companies are increasingly turning their attention to the practical implications of the regime. In doing so, it is useful to consider some of the lessons learnt from the product governance aspects of the European Markets in Financial Instruments Directive (MiFID II).
Key lessons for successful implementation:
Enhancing the product governance framework
As many companies have learnt from their MiFID II implementations, it is easy to place too much emphasis on meeting specific regulatory requirements and lose sight of the overall purpose of the regulation (as well as the implications of product accountability under BEAR). The implementation of DDO should be part of a holistic review of the product governance framework, identifying where DDO has a direct impact but also ensuring the framework is fit for purpose and meets the overall objective of placing the customer at the heart of product design and distribution.
Figure 1 – Product Governance Design Principles
In defining and determining the relevant target markets, companies will need to develop detailed criteria and consider the review triggers that will result in a review of the product. For reviews to be effective and scalable across an entire product range, the process should be clearly defined as part of the product governance framework and thresholds for specific review triggers defined at the point where the product is designed.
A consistent approach across the industry
In implementing MiFID II, several companies have adopted the European MiFID Template (EMT) to help define their target markets and share this information with distributors. The EMT was produced by companies and industry bodies as opposed to being regulator-issued guidance and has helped adopt a consistent and practical approach to the requirements.
Adopting a similar approach for DDO could help to spread the burden of implementation and assist companies in defining their target markets in a uniform manner, requesting similar information from distributors and providing clients with consistent information across similar products.
Figure 2 – Key EMT Target Market Criteria
The requirement for target market determinations to be publicly available places further pressure on companies to define the target market as accurately as possible. Customers will have more opportunity to shop around for a product that is designed to closely match their needs and regulators will have greater access to information and the ability to compare how different companies are assessing the market for similar products.
Effective data flows
A common issue arising from both MiFID II and DDO is that issuers and distributors are required to share information on a much more formal and detailed basis than ever before. There are several factors that to consider in order to make their data management as seamless and efficient as possible:
A recurring theme in regulatory change programs is that when companies fail to devote sufficient time and resources to solving data challenges, they are often forced to adopt manual workarounds and tactical solutions. A key factor in the successful implementation of DDO will be the extent to which companies are able to establish a sustainable and strategic solution to managing the data and reporting requirements.
Where does this leave you?
Rosalyn is a partner in Deloitte's Melbourne office in the Governance, Regulation and Conduct practice. She specialises in supporting firms to design and assess frameworks to treat customers fairly, including the development of conduct, product governance, sales practices and complaints handling frameworks.
Simon is a Director in Deloitte’s Investment, Wealth and Treasury team. He specializes in working with clients to implement regulatory change, develop risk management frameworks and improve the efficiency and effectiveness of Compliance functions.