Conduct When Sorry Isnt Enough - FINAL May 2015

www.pwc.com.au

Conduct: When sorry isn’t enough…

May 2015

Conduct risk: The Australian experience p3/ Aligning conduct risk with the customer-centric strategy p4/ Measuring success p6/ How PwC can help you stay ahead of the conduct risk agenda p8

Conduct risk is attracting greater attention in Australia as financial institutions focus on a customer centric business model. It can be an enabler rather than a brake to creating customer value and achieving better customer outcomes.

Defining conduct risk...

The risk that a firm’s products and services, processes or behaviours do not deliver fair outcomes for past, present and future customers

Conduct risk: The Australian experience 1

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The UK experience with conduct risk and product mis-selling shows us that even if Australia has avoided the worst excesses to date, there is no room for complacency. There has been increased scrutiny across market segments, however efforts to address underlying causes of conduct risk have been reactive, tactical and product focussed.

Managing conduct risk strategically to deliver a compelling customer outcome

By aligning and applying experiences and learnings from the UK, regulator expectations and broader customer centricity objectives, Australian financial institutions can realise business benefits and simultaneously achieve compliance and enhanced customer outcomes to enable the right product for the right customer at the right price and right time.

The FSI consumer recommendations in relation to the fair treatment of customers to ensure better customer outcomes is conduct risk driven. It is underpinned by a cultural and behavioural desire to treat and address the needs of consumers at every point of the product lifecycle – not just at the point of sale.

We believe Australian financial institutions need to respond quickly to optimise this unique opportunity to address conduct risk strategically.

Managing conduct risk enables financial institutions to minimise exposure to regulatory enforcement actions and drive a business imperative such as:

• increased retention and cross-sell driven by targeted solutions

• better customer engagement and stickier long-term relationships

• lower costs driven by elimination of inefficient product development processes

• Reduce the burden of complaint resolution/ remediation activities

• enhanced reputation with customers and regulators.

Although Australian financial institutions have generally been operating in a balanced regulatory environment, the regulators’ narrative and offshore developments have set a clear direction of travel.

Australian financial institutions can expect increasingly proactive surveillance and higher product and service expectations from customers. Misconduct and other conduct risk failures present and past can no longer be treated as one-off incidents.

Aligning regulator and key stakeholder expectations to broader customer centric strategies is key to effective mitigation, enhancing the customer experience and market differentiation.

There is no room for complacency…

Market sentiment and regulation in relation to conduct and mis-selling risk are quickly evolving and have the potential to be profound. Australian institutions are facing an increasingly intense public interest and media scrutiny in their treatment of customers. The lessons from both global and domestic trends carry important implications for our market and need to have greater focus on conduct risk and customer outcomes.

The desire for key regulators to drive organisations to enhance customer outcomes from an end-to-end product lifecycle perspective has been heightened by:

• mis-selling scandals in the financial advice industry

• rate benchmark manipulation

• constant media scrutiny and public interest

• the most recent outcomes of the Financial System Inquiry (FSI)

• ASIC’s identification of conduct in financial services and the welfare of the Australian customer in its recent Strategic Outlook.

Aligning conduct risk with the customer-centric strategy 2

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Whilst customer centricity seems to be the key pillar of most organisational strategies, often it is narrow in focus and concentrated around initiatives to understand the voice of the customer. Conduct, on the other hand, whilst aligned with the desire to understand customer needs, is about changing behaviours and the lens through which business decisions are made.

To PwC, a good customer outcome contemplates products and services that are designed to meet customer needs, processes and infrastructure that enable consistent fulfilment and behaviours of wanting to do the right thing by the customer in a commercially focused manner.

This requires looking beyond the customer experience to consider product suitability across the whole business model to achieve the right outcome for the customer. This is supplemented by risk and compliance routines which proactively scan for potential vulnerabilities.

We assess this by looking at the Product Lifecycle through the eyes of the customer and other key stakeholders…

Distribution

• Are we providing Distribution with products relevant to their clients?

• Are we supporting Distribution with proper training, documentation and sales support?

• Is our Distribution proposition aligned with our customer proposition?

• Are we bringing Distribution into the product lifecycle and maximising their customer insights?

Regulators

• Are the 3LOD operating effectively?

• Is there sufficient oversight and monitoring of products throughout their life?

• Are products subject to ongoing risk assessment (e.g. changes in the macro and micro environment)?

• Is the process informed by regulatory obligations?

Shareholders

• Is our portfolio sustainable and profitable?

• Are our product processes simplified and efficient?

• Do we understand ‘good vs bad’ profit and do we balance the backbook/front book tradeoff accordingly?

• Do we effectively manage risk?

Selected ‘High Maturity’ Principles – Customer lens: Right customer, right product, right time, right information, right price

• Customer takes primary focus in new product approvals and business case documentation.

• Products meet the needs of identified segments and are targeted accordingly.

• Products perform as expected.

• Customers receive clear information which they understand. They are kept appropriately informed throughout the lifecycle.

• Absence of unreasonable post-sale barriers imposed by firms to change product, switch provider, submit claims, etc.

• Pricing is reflective of the value to the client.

PwC’s Customer-led Product Lifecycle Framework

Product Development

Customer Information & Marketing

Product Life

Product Close/

Retention

Governing Bodies

• Is there sufficient oversight and governance by Boards, Committees and other bodies?

• How do these groups balance the interests of Customers, Advisers, Regulators and Shareholders?

• How are members interests balanced with trustee duties and fiduciary obligations?

Customers

• Are customers ‘front and centre’ across the product lifecycle?

• Are we providing products that meet our customer needs and support our customer value proposition?

• Are products well understood by customers?

• Are products responsive to the clients changing needs?

• Do customers feel they are getting appropriate ‘value for money’?

Sales, Distribution

& Advice

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Mature the lifecycle through the eyes of the customer while balancing outcomes for all stakeholders

A greater focus on the customer agenda requires the customer lens to be applied, however none of these lenses operate in isolation. A holistic assessment across the conduct lifecycle requires fair and balanced outcomes for all key stakeholders reflected through the five lenses.

Culture & Behaviours

Measuring success 3

What’s new? The profile and needs of the target customer takes primary focus in the product development process. This includes gauging customer needs at point of design (through focus groups and voice of the customer studies) and rigorous product testing to ensure products and their supporting processes can reliably deliver the product features – point of time and into the future.

What’s new? Opportunities are continuously identified to simplify new and existing product and remove those no longer meeting customer needs. Predictive analytics and data sources such as complaints, profitability margins and market activity are used to assess the viability of existing products. When it is no longer ‘customer viable’ or a compelling reason has been identified, the product may be closed, enhanced or retained.

New and leading practices at each stage of the Product Lifecycle

The Product Lifecycle places the customer at the core of each stage and at the heart of its business model. Historically the performance of each stage has been measured in silos. However leading practices adopt a holistic approach that considers the conduct lifecycle on a continuous basis capturing the end-to-end experience across all life stages of the customer.

Reviewing the inputs and outputs at each stage of the conduct lifecycle demonstrates: right customer, right product, right time, right information, and right price.

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What’s new? Use of customer data, social media and other big data monitoring to generate behavioural insights. Marketing strategies are developed based on analysis of customer preferences and provide a balanced view of features, risks and trends in relation to products and product needs.

What’s new? Channels for the sale of different products are controlled. Distribution channels own and manage conduct and behavioural expectations, sales are monitored for compliance, customer experience and understanding using predictive and detective controls and indicators. Espoused values and expectations are understood and incentives are aligned to long and short term customer outcomes rather than sales volumes. In some organisations all product and sale targets have been removed for branch staff and everything is measured by customer inputs (e.g. number of meetings).

What’s new? Ongoing servicing, performance and suitability of the product for the client is monitored, assessed and managed over time. Organisations identify and leverage predictive and detective indicators (e.g. sales, complaints, claims, service levels, churn) to identify potential product deficiencies. Servicing processes are streamlined under continuous improvement initiatives.

The transformation to achieving a holistic view is a significant undertaking; requiring changes to organisational practices and behaviours, management measurement, data and reporting information into defined tolerances across financial and non-financial measures. Those organisations which have made progress have achieved:

• a better understanding of how they align to their customers’ needs

• a tailored customer experience improving the customer relationship

• increased customer retention and profitability per customer

• simplification of products and processes as well as reducing the risk of conduct failure.

Benefits of holistic conduct risk management

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How PwC can help you stay ahead of the conduct risk agenda 4

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At PwC our multi-disciplinary teams provide informed and relevant support to our clients. They draw upon a range of skills to help you stay ahead of the conduct risk agenda.

Culture and behavioural

Provide conduct risk culture and behavioural assessments across the organisation

Reward and incentives

Review remuneration structures and develop balanced scorecards

Regulatory compliance

Perform product lifecycle and sales practices reviews including one-on-one interviews and shadow shopping

Strategy and customer

Build customer centric propositions, design and deliver compelling customer experiences

Risk and governance

Design and implement risk and governance frameworks and process reviews

End-to-end process and control reviews

Review processes and controls to highlight areas of administration complexity creating risk for business operations

Data analytics and performance metrics

Identify leading and lagging indicators, develop relevant reporting and perform diagnostics of early warning indicators on problems and anomalies

Validation of core systems and data

Validate core systems back to sources of truth to provide assurance that the product is administered in accordance with PDS, policy and plan

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Contacts

Nicole Salimbeni Partner Consulting

Tel: +61 (2) 8266 1729 Email: [email protected]

Rachel Phelan Partner Consulting


Julie Coates Partner Consulting


Edwina Star Partner Consulting


Mark Hannam Principal Assurance


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There is no room for complacency.

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Job No. 127026155

Conduct When Sorry Isnt Enough - FINAL May 2015

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