Case study of Know Your Distributor DDO solution

By Penny Pryor

PX Partners have recently launched a product - called 'Know Your Distributor' -  to support issuers and distributors of financial products in meeting obligations under the new Design and Distribution Obligations (DDO) regime due to go live early in October. PX Partners co-CEOs Tanushree Dabral and Jon O'Keeffe answered some questions about the product for Industry Moves.

What goes into launching a new product?
It definitely depends on the product! Our journey to get to the KYD solution was an interesting one. We spent a lot of time speaking with product issuers and distributors about the new design and distribution obligations (DDO). It soon became clear that there was no solution in the Australian market for the distributor selection and monitoring component of the new requirements. Once the opportunity was identified, we went on quite a journey, including looking at options to build the technology ourselves, while at the same time scanning the globe for existing technology. We were fortunate to find a technology partner based in the UK servicing the European market with a market leading solution for distributor monitoring which we could deploy to benefit the financial services industry in Australia.

Can you explain the KYD solution a bit more?

KYD is an all of industry RegTech solution for distributor selection and monitoring. By using a dynamic and contextual due diligence tool, distributors provide responses once through the KYD system and permissions access to product issuers to this information. Both product issuers and distributors benefit from reduced time, costs and pain which is often associated with distributor monitoring and due diligence.

The experience in Europe following the introduction of Markets In Financial Instruments Directive (MiFID)II has been that it is not feasible for issuers to obtain meaningful information bilaterally (such as complaints information). This is exacerbated where there is intermediated distribution. So, the better way of meeting compliance with the obligations is to consider systems and controls which can support effective product governance frameworks.

Why did you decide to launch now?

DDO comes into effect on 5 October 2021 so we're really excited to be able to bring a tried and tested RegTech solution to benefit the industry in Australia. This is not just a day one set and forget activity - distributor selection and monitoring forms part of demonstrating reasonable steps under the new DDO regime.

How did you research market opportunities?

Through our existing business, PX Partners, we have been fortunate to work with firms across the financial services industry. This is in addition to our extensive network of other advisers and service providers. In all of our DDO conversations over the past couple of years, the theme of technology being key to meaningful compliance came up again and again. So, the opportunity was clear to us and by partnering with an experienced provider, we could learn from the European experience of MiFIDII.

Do you think the industry is ready for DDO?

It has been a long road to get here and when DDO was conceived for the industry in Australia, it couldn't have been foreseen that we would be contending with a global pandemic at the same time. Additionally, there are other new regulations that land at the same time such as the new complaints regime (RG271) and breach reporting requirements among others. 2021 could be the biggest year of regulatory change in Australia since Financial Services Reform (FSR) came in to force in 2003. But we believe the industry has really stepped up to meet the challenge in some very difficult circumstances. Everything might not be fully completed for day one so it is important that the momentum continues on this important change past 5 October.

What challenges did you face and how were they overcome?

The KYD solution represents a shift for some firms in how distributor monitoring is conducted or, in some cases, commencing monitoring for the first time! And introducing new technology is a change but we are fortunate that the KYD solution has been tried, tested and used by over 1000 distributors to ensure that meaningful information is being provided for issuers to discharge their obligations.

How did you decide on service providers?

We undertook a global search for a technology partner. Given the similarities between the DDO and MiFIDII regime, we found some firms in Europe who had developed technology solutions to meet compliance. We selected the leading firm in distributor selection and monitoring, which provides not only the technology but a support team who follow up outstanding distributor responses taking the admin burden off product issuers who can focus on the commercial relationship.

Can you explain the fee structure?

The KYD solution is free to distributors. Issuers are charged depending on the number of distributor responses they chose to access. A fraction of the cost of a resource to do the same work!