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Product design and target market description
This is the second topic in a series of articles where we discuss the top 5 issues to consider in relation to the new Financial Services Design and Distribution Obligations (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 we see it, there are five key issues facing financial institutions in meeting their DDO obligations. We’ve already talked about the importance of Accountability, and this article addresses the second issue we are seeing in building out effective Target Market Determinations (TMDs).
At its core, DDO is about matching product features to the (likely) objectives, circumstances and needs of the recipient customers. Whilst this may sound like something your organisation does already – and hopefully that is the case – what is new is the degree of formality required within the end-to-end processes supporting this crucial activity.
In order to sell a financial services product from 5th October (including both new and existing products) the matters prescribed by the regulations must be documented in a Target Market Determination.
Requirements of a Target Market Determination
At a high level, the content of a TMD document must:
- describe the target market – the customer segment, the product and how the product suits the customer segment
- specify any conditions or restrictions on distribution
- specify ‘review triggers’, review period timing and frequency
- specify the timing and information that must be reported about complaints; and
- specify the kinds of information needed to promptly identify when a TMD may no longer be appropriate
Additionally, the TMD must ensure that that the ‘design’ of the above elements is reasonable – i.e. that all of the above are likely to work to ensure that customer outcomes match their objectives, circumstances, and needs.
“It might be useful to think of the TMD as a well-developed ‘business case’ but with one clear difference: the benefits lens must be that of the customer.”
None of the listed requirements includes whether the product can be easily sold or if it is profitable, which would be the focus of a traditional business case. It is perhaps worth considering how different is this from what your organisation does today.
Important considerations
There are three other matters to keep in mind when planning your DDO activities and resources, for both implementation and ongoing operation and administration of TMDs:
- The level of detail involved;
- The assessment; and
- The decision making involved – all of which needs to be documented (more on that later).
To illustrate the level of detail, here is the list of questions ASIC sees as ‘a starting point’ for items that need consideration:
Source: ASIC RG 274 Table 3: Critical assessment questions
| Matters to consider | Questions to answer |
|---|---|
| Purpose | - What is the purpose of the product? - Is it fit for purpose? - Does the product include features or attributes that are inconsistent with the objectives, financial situation or needs of consumers in the target market? - Does the product (including its key attributes) benefit the consumers in the target market? - Does the product (including its key attributes) fulfil a well-founded needs for consumers in the target market? |
| Past outcomes | - Has the product (including its key attributes) resulted in good outcomes for consumers in the target market in the past? - Did it deliver what was promised? - Who has benefited from this product or this type of product in the past? - Did the product meet the needs of those to whom it was distributed? - What does the data show were the ongoing benefits, risks, and outcomes for consumers? |
| Likely future outcomes | - How is the product likely to perform in the hands of the consumers in the target market? - Is the product likely to deliver what is promised? |
| Refinement of target market and/or product | - Does the product need to be redesigned or changed to be suitable for consumers in the target market? - Does the target market need to be narrowed? |
These matters raise several more important questions about the data and analytical capabilities you will need to meet regulatory obligations:
- Do you have (today, or the capacity in the future to obtain) the data required to answer these questions?
- Have you put in place (or are you putting in place) the analytic resources and knowledge needed to assess the above matters?
- Are your decision-making mechanisms able to consider all the detail and make the decisions necessary to action the outcomes of these questions given the potential consequences?
Historically, if the answer was ‘no’ to the questions above you may have been at risk of a poor decision. Now you are also at risk of non-compliance that carries the obligation of remedial action to either change the product, change the distribution or stop selling the product altogether.
One final question
With DDO soon becoming enforceable, is your organisation on track to be both compliant and capitalise on the opportunities?
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.
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Michael Hartman
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.
