DDO Implementation
Learning lessons from MiFID II
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:
- It is essential that companies use DDO as a catalyst for developing and enhancing their product governance framework as a whole rather than focussing on point solutions that meet individual requirements.
- Companies should work together to develop an industry-wide consensus (perhaps through a consistent template) on the input for target market determinations and the mechanism for sharing information between issuers and distributors.
- Effective management of data and reporting is essential, both for demonstrating compliance with the obligations and for enabling firms to make the best use of the new information they will have access to.
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.
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:
- Issuers should identify exactly what information they require from distributors and communicate this at an early stage in their implementation program.
- Develop workflows for communicating this information, aiming for as much consistency across product lines and between organisations as possible.
- How data will be stored and analysed and whether the increased availability of information could have a commercial or strategic benefit.
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?
- Is your product governance framework fit for purpose and supported by sufficient review and challenge from a range of stakeholders?
- Can you demonstrate that the control environment supporting product governance is proportionate to the scale and complexity of your product range?
- Do you understand the impact of DDO and are you exploring technical solutions to create a more integrated approach to product governance?
- Do you have a plan for addressing the DDO requirements in the short term and a view of how this can be scaled into a more sustainable solution capable of handling growth in product flows?
