New regulations are coming soon. How will your organisation approach DDO?
With DDO Obligations fast approaching with the 5th October deadline – we are having more and more conversations with those grappling with meeting these new requirements.
As these are regulatory compliance obligations there really isn’t an option, but whether the activity is undertaken from the mindset of “wanting to” or “having to” may determine whether or not your organisation extracts benefit or simply incurs greater cost and risk.
There may well be substantial benefit from improving the alignment of the benefits of your products to the needs of those to whom they are sold such as increased sale and lower costs (e.g. better conversion rates, greater marketing efficiency, etc.). There are also likely to be fewer complaints and resulting rework (both of which are very high cost).
Top 5 issues to consider in preparation for DDO
As we see it, there are five key issues facing financial institutions in meeting their DDO obligations with a mindset that will not only enable compliance, but also drive increased sales and lower costs, reduce complaints and, ultimately minimise your being at risk of rework and remediation down the track.
1. Identifying, confirming and driving clear accountability
When you look at the requirements of DDO, they can seem relatively straightforward, but we have seen many organisations struggle to effectively commence their work to meet these requirements because accountabilities are not clear. To successfully manage the complexity of execution, one fundamental question that all those who come under the DDO face is – whose job is it? See our article on accountability for DDO and the various considerations here.
2. Designing an effective Target Market Determinations
Working out what products you offer and defining their target markets is the first part of developing Target Market Determinations (TMDs). If you are not familiar with the DDO requirements this may seem like a very simple task, something you already have on hand or something that requires little or no change to your current products, how they work, and the benefits associated with using them. This might not be the case, especially if any of your products rely on inherent cross-subsidisation – some customers paying disproportionately more or less than the level of benefits they receive. See our article on Target Market Determinations – Design here.
3. Establishing the processes to comply with your Target Market Determinations
Once the product and its intended market are defined, the next step is to ensure that the approach to distribution results in the product ‘only’ being sold to those it is designed to benefit. This also includes the activities of any third parties who sell (or recommend) your products which involves a material level of detailed instruction, interaction, data, and reporting exchange and ultimately accountability for their actions. Whilst that may not be new, it is likely that the perspective of ensuring only those who benefit from the products are sold the products may require changes to current practices. See our article on Target Market Determinations – Distribution here.
4. Effective data management – record keeping, monitoring, reporting and notification
All information must be captured. From end-to-end of what you considered, how you made decisions in relation to the product design and distribution aspects of the TMD, regular reporting back from distributors (including your own distribution), analysis and review of results, to actions taken to rectify issues identified and the reasons for those actions. Whilst some may capture parts or even most of the information today, experience suggests such information may not be organised in a way that enables it to be easily analysed and reviewed within the very short timeframes required under the breach self-reporting elements of the DDO regulation. See our article on effective data management here.
5. Robust governance, oversight and change management
Unlike other obligations such as NCCP Responsible Lending which primarily deals with a point in time decision (i.e. the initial selling decision), these new obligations are more holistic. They extend across the entire lifecycle of the product considering how the product is used, and whether its intended benefits are actually realised…requiring that the promise of the product is actually fulfilled. There are requirements to monitor the full lifecycle, assess the results (within short timeframes), and act based on those results. If the product’s benefits are not being realised by those to whom they are being sold, there are only three remedial options:
- The product design must be changed;
- The approach to distribution must be changed; or
- The product must no longer be sold.
Each of these actions, given the span and gravity of their potential impact, is likely to require Executive and potentially Board-level decision-making. See our article on governance, oversight and change management here.
If you have questions about DDO or need assistance in working out what needs to be done or how you are travelling in your preparations, we are here to help. Feel free to get in touch with our experienced team.
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Senior Manager Risk & Compliance
A dedicated practitioner who is always across the detail, Michael applies a structured approach to risk assessment, assurance information gathering, decision making and implementation to ensure execution matches intention.