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Design and Distribution Obligations – Distribution specifications

Business people planning

Designing effective Target Market Determinations – Distribution Specifications

This is the third topic in a series of articles where we discuss the top five 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 the importance of Product Design and matching benefits to likely customer needs circumstances and requirements.

This article addresses another challenging element – the rules governing the distribution, which is also the required content of each Target Market Determination (TMD).

A key part of matching product features to the (likely) objectives, circumstances and needs of the recipient customers is ensuring that distribution practices are tailored so that the product is actually sold to (only) those in the identified target market.

Whilst this may sound like something your organisation does already – what is new is the degree of formality required in both the setup and ongoing management and governance of the end-to-end processes involved? The question is no longer just “are we making money?”, or even “are customers happy with the product?”, but rather “are customers actually likely to get the promised value from the product?”, and the evidence for which needs to be proven over time.

Every TMD document must:

  • Specify any conditions or restrictions on distribution;
  • Document why those restrictions are appropriate;
  • Specify review triggers;
  • Set out the frequency and timing of periodic reviews;
  • Define reporting requirements – what information distributors must provide to issuers and when.

The TMD must also ensure that the above elements are reasonably likely to work, to ensure that the customers to whom the product is sold are within the target market and that if not, appropriate actions are taken, and their results are recorded, monitored and reported.

When developing each product’s distribution requirements that are included in the TMD, there are two perspectives that need to be considered and addressed:

  1. Whether you sell your own products; and
  2. Whether third parties sell your products.

Whilst the obligations are the same, there are material implications in how you communicate and administer them both initially and ongoing.

An important third perspective – whether you sell products supplied by others.

Initially, some clients considered this as not as important. But, once getting into the detail, they are now realising how material those implications are to operations, data management, monitoring and reporting.

With DDO soon becoming enforceable, now is the time to ensure your organisation is on track to be both compliant and capitalise on the opportunities that the DDO present.

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.

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