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Design and Distribution Obligations – Governance, Oversight and Change Management

Business discussion

Governance, Oversight and Change Management

This is the fifth 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) due 5th October.

In this insight, we take a look at important aspects of DDO – decision making (governance), monitoring and assessment (oversight), and correction (change management).

Beyond achieving compliance, there are substantial commercial benefits likely to arise from DDO related activities to improve product management practices. However, this is only likely if the work is undertaken with the mindset of “wanting to” – making the most of the situation rather than “having to” and doing as little as possible.

One way to approach that could be to ask this simple question in relation to each of the obligations:

How could doing ‘X (each obligation)’ enable me to better manage product performance? 

From our perspective, there is virtually nothing required that you would not include if you were seeking to make the most of your approach to product management.

Here is a brief summary of the aspects involved.

Governance

Accountabilities and decision-making authorities need to be clearly defined.

The scope of decisions involved spans the full product management lifecycle – product design, product distribution, monitoring and review – and where appropriate, based on results, taking corrective action.

Product Design

  • There must be a ‘system’ for product design and approval;
  • The product must be assessed as likely to meet the objectives, financial situation and needs of those in the target market;
  • The information considered and decisions taken must be documented and records kept; and
  • Product development must consider the customer outcomes – in particular, whether all of the customers are likely to benefit from the features of the product.

If the answer is no to any of the above for existing products, then changes must be made to the product or the distribution. Otherwise, the product can no longer be sold.

Distribution Design

The approach to distribution must be designed so that only those in the target market will be sold the product – this is likely to involve setting up restrictions.

Beyond design, steps must be implemented to ensure that the approach to distribution is followed, and deviations are detected and addressed.

If historical practices resulted in a product being sold to customers outside of the new target market, then changes to distribution are required.

  • For new products, there is a requirement for robust testing of assumptions, and the means of testing needs to be stipulated with appropriate provision made for its undertaking (data capture, analysis, assessment – including resourcing)
  • For continuing products, the target market must be defined and the distribution strategy needs to ensure that only those likely to benefit are sold the product and with monitored outcomes and changes made as needed.

Of particular note:

  • Products that will no longer be sold but have a renewal feature
    The example that ASIC provides related to ‘roll-over insurance’, and suggests that with the passage of time a customer’s objectives, situation and requirements may change, with the possible result that they are no longer in the target market and therefore should not be ‘renewed’ i.e. sold the product again.
  • Products that offer choice (i.e. bundled products or products that offer tailoring by the customer)
    Even if the customer is able to ‘pick’ what features they want, there is an obligation on the issuer for only features that they are to benefit from to be offered and on the distributor to only sell only those features.
  • Use of behaviour economics
    It is expected that such tools are utilised to assist in ensuring that only those customers who are likely to benefit from the features are sold the product – by guiding them towards elements that meet their objectives, financial situation and needs.

Oversight

The means of monitoring, reporting, analysing results and determining what actions (if any) are required all form part of the second leg of the obligations.

Continual Monitoring, Analysis and Reporting

These involve measuring and assessing both:

  • The Activities – whether distribution actioned stayed within the boundaries of the distribution restrictions; and
  • The Outcomes – how the customer used the facility and whether or not the potential benefits were realised, as well as capturing complaints and customer feedback.

Change Management

Performance must be assessed regularly. Where products are not meeting the target markets objectives, financial situation and needs or where distribution is resulting in sales beyond those in the market, the appropriate corrective action must be identified and taken.

It is important to note that there are considerable regulator notification obligations that include explaining what actions have been taken to address issues identified.

It is also a requirement that all of the above must be documented, fully implemented and review regularly for ongoing effectiveness.

A final question

The above is only a summary of what is required; the detail is extensive. That said, it may be worth asking if you were to ignore the regulatory obligations, are there any aspects of the above that could not be leveraged to better manage your products?

We believe that answer is clear – the work required to meet the DDO requirements can and should be undertaken as a means of improving product management.

With DDO to soon become enforceable, it is important to ensure your organisation is on track to be both compliant and capitalise on the opportunities that the DDO present to improve product management discipline and deliver improved financial outcomes.

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.

Our next and final insight will be a quick recap of DDO and include some further practical suggestions as to how meeting these obligations can be leveraged to improve growth and product performance.

 

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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.

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