Reframing regulatory change as an opportunity for growth in financial services
By Garth Williams and Vish Ravindran
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For financial services organisations, October may have felt like the finish line in a marathon of regulatory change, with the arrival of new complaints management requirements, breach reporting rules, design and distribution obligations (DDO), and anti-hawking reforms.
Regulatory change is nothing new in the industry, but three of the reforms in particular – breach reporting, DDO and complaints handling – call for more than just minor adjustments to existing compliance plans. Instead, businesses will need to fundamentally change their operating models, use of data and overall mindsets. And to achieve this, they will need to invest in new systems, processes and training.
We think it’s vital that organisations don’t think of this as just another compliance spend. Instead, they should consider it an investment in strategic infrastructure – an asset that will equip them to better serve their customers and drive their growth agendas for years to come.
Overview of key reforms
Breach reporting
The new breach reporting rules significantly lower the bar for what types of conduct need to be reported, while requiring organisations to provide much more information about each breach they lodge. As a result, the industry faces a steep increase in the number of incidents that need to be assessed and reported, compounded by the challenge of rapidly collating information within the 30-day reporting deadline. Mandatory questions to answer for each breach means that organisations will for the first time have a structured set of data about past breaches that they can easily mine for insights. They also need specialist resources and infrastructure to analyse themes and proactively address insights in real time.
Design and distribution
The DDO reforms mark a shift in the philosophy underpinning financial services regulation by requiring product issuers to determine the appropriate market for their products to make sure their products are sold to the right people. This is a shift from ‘buyer beware’ to ‘seller beware’.
Big data is again at the heart of this reform. In addition to determining their target market, product issuers must regularly gather and analyse information from distributors about who purchases their products, to ensure ongoing alignment with the Target Market Determination. To comply with these new obligations, product issuers and distributors must compile rich datasets detailing their customers, sales practices, complaints and issues. They also need the resources and tools to analyse this data, so they can understand how the products they make and sell are operating in the market.
Complaints handling
The new regulatory guide RG 271 ushers in a radical rethink of how organisations capture and deal with complaints. Businesses must now proactively analyse complaints data and identify systemic issues, then plug insights from complaints data into organisational decision making and use it to drive a culture of continuous improvement – in complaints handling but also general business operations. RG 271 makes complaints handling everyone’s business, from the board to the front line.
From compliance to growth
These reforms were designed to enhance compliance practices and protect customers. But approached with the right mindset, they also present organisations with four new ingredients for growth.
1. An enterprise-wide view
As a result of the reforms, it has become a legal obligation to remove divisional blinkers and take an enterprise-wide view. Organisations should see this as an opportunity to make better products and distribution experiences that their customers will love.
A consistent theme in the Financial Services Royal Commission case studies was organisations being so siloed that product manufacturers could be unaware of how and to whom their products were sold. The DDO reforms close this gap: product manufacturers must now consider their target market and design products accordingly, and the accuracy of that alignment is tested through a mandatory feedback loop from distributors.
The complaints handling changes also challenge organisations to take an enterprise-wide view by identifying insights from distribution complaints and using them to create better products. As they close the loop between product manufacturing and distribution, organisations gain access to incredibly rich information about how customers actually experience the products they buy.
Ingredient 1: Enterprise-wide view
- Close the loop: Put the systems in place to gain end-to-end visibility from product manufacturing to distribution and feedback from end customers.
- Enhance products and distribution: Use this valuable new information to design better products and services, and enhance distribution processes.
- Retain and grow: By building products and experiences that customers love, businesses can increase retention and expand market share.
2. Rich data
Innovation often comes from unexpected places. COVID-19 gave many the nudge they needed to transform the way they work using digital tools that were already available. Likewise, the recent law reforms may be the push organisations need to truly harness their own data to drive innovation and growth.
At the heart of each of the three major reforms is a requirement to capture and analyse data. Organisations have long understood that harnessing data about their products, customers, successes and failures is critical to identifying business opportunities. Compliance reporting data is business intelligence by another name. It’s a reliable driver of informed growth and improvement – and now that it’s mandatory, organisations will have it on tap.
Ingredient 2: Rich data
- Start simple: Avoid the temptation of trying to build a data model that solves all of your organisations' problems on day 1. Focus on quick wins like identifying opportunities for process improvement and build out from there.
- Data capture: The new reforms mandate data collection, so organisations looking to turn investment into advantage should consider what data points may prove useful in the future and collate them in parallel where feasible, while streamlining the data entry process to encourage timely capture of key figures.
- Data management: Centralisation, consistency and timeliness are fundamental to efficient reporting. These factors are also fundamental to data security and quality data management for a wide range of use cases. Getting data governance right is critical.
- Data insights: Datasets are becoming more and more complex, allowing organisations to segment, prioritise and expand on opportunities like never before. With data analysis, a 60-second query can draw insights which once would have taken months to find. Issuers and distributors can be mutually beneficial producers and consumers of data insights, as can strategy and risk teams.
3. Continuous learning
One of the most remarkable features of the new reforms is that they make continuous learning a regulatory requirement. RG 127 and DDO require organisations to proactively analyse complaints data and learn from it. Organisations also have a strong incentive to analyse and learn from their breach reporting data to avoid being outflanked by the regulator.
In a sense, the reforms require organisations to adopt a growth mindset – to reflect on and learn from their mistakes, so they can better serve their customers. In a world where firms must innovate to achieve significant growth, this continuous learning mindset can be a critical ingredient in finding opportunities to do things differently and better.
Ingredient 3: Continuous learning
- Promote a growth mindset: To realise true value from your data insights you need to promote a culture where team members believe that both they and their organisation can always grow and improve. Opportunities are all around us when we know how to recognise them.
- Measuring the right things: Ensure incentives are correctly aligned with compliance and productive business outcomes. This gives teams the flexibility to address challenges in agile and innovative ways, while allowing management to track improvement.
- What does the strategy mean for me?: To promote the right types of innovation make sure your team is clear on the organisation’s strategy and values, so team members know how to contribute to the bigger picture.
4. A customer-centric approach
The new complaints handling rules require boards, executive committees and operational teams to listen to and learn from their customers. They also make it clear that analysing complaints is not enough; organisations must act on the insights they acquire.
Many financial organisations have already worked hard to become more customer-centric, but now they are legally required to embed the voice of the customer in business decision making. Organisations that do it well will be able to act on real and recent feedback from the people they are striving to serve, instead of designing products and services in a vacuum.
Ingredient 4: A customer-centric approach
- Tangibility: Knowing the voice of the customer is important is inarguable; knowing what to do about it is a different matter. The compliance with the regulatory reforms produces data points that can act as a foothold for reporting on and improving customer- centricity.
- Improvement: Paying close attention to complaints and breaches provides insights into demand. Reviewing complaints can be more effective and cheaper than market analysis for enhancing complementary services, delivery channels and product specifications.
- Alignment: Align other organisational settings so they also keep the customer at the centre. CPS 511 emphasises the need for a customer-outcomes focus in remuneration.
Next steps
For the financial services sector, October marked the end of a marathon effort in getting ready to comply with new regulatory requirements. Now the real work begins. The challenge is to move from baseline compliance to a more sophisticated, sustainable approach that captures the opportunity inherent in these reforms and transforms mere compliance into strategic gains. Organisations that approach this as a source of opportunity rather than a burden will be well positioned to outpace their competitors as they convert this potential into real growth.
