DDO Implementation - How prepared are we?

Introduction

The new Design & Distribution Obligations (DDO) implementation is designed to shake up the distribution and marketing of products by financial services organisations across the spectrum. The purpose of the regulation is to ensure that companies take a customer centric rather than a profit driven approach to designing and marketing their products and ensure that they monitor the performance of their products to ensure they continue to meet their customers’ financial needs, current financial situation and financial objectives.

The Financial Services Council (FSC) organised a workshop in September where participants could hear from ASIC and industry experts ?Vinod Kumar, Vice President - Legal, BlackRock, David Barrett, Division Director & Head of Technical Advice, Macquarie Investment Management and Stephen Judge, Head of Legal - Individual Life, TAL Australia about their observations on industry preparations for the DDO, and the approach to enforcement and assistance within the regime.

DDO Implementation Session

The session began discussing cross industry views on the implementation of DDO from three viewpoints: an investment manager, a life insurer and a distributor. Given these quite distinct roles it was surprising to hear that there were some common themes.

Broadly the mood surrounding DDO is positive, engagement with ASIC has been good and the regulations are seen to be a formalising of products and procedures to ensure customers get better outcomes. DDO is also seen to lead to a better understanding by product providers of their products, distribution channels and who their customers are.

Target Market Determinations (TMDs) are seen as evidence that an organisation is “participating” in DDO but providers need to ensure these are tailored to their individual circumstances. TMDs are, however, just the tip of the iceberg; the framework is integral and how this stands up to external scrutiny is key. It is expected that the TMD requirements will remain fixed for at least one reporting cycle and then these will evolve based on feedback from the market.

Interestingly, 98% of distributors surveyed were “somewhat” to “not at all” prepared for their DDO obligations.?While this may seem concerning, some view “being late” to DDO as being inevitable as there have been many late changes and developments to the regulations.

The challenges are distinct for each stakeholder. Investment managers feel the challenge will be reporting on the non-advised, direct channel where consumers cannot necessarily be relied upon to read disclaimers. They believe that some products will be redesigned or even withdrawn from sale as a result of the DDO.

For distributors, because there are a number of obligations, they may need to provide the product issuer with an assessment of whether personal advice falls outside of the TMD; if it does then an exceptions process will need to be developed which includes reporting to the issuer. It is hoped there will be a limit on the reporting requirements so that they do not become too onerous.

For Life Insurers there is a need for clarity on whether certain areas will get relief such as insurance reinstatements due to credit card details expiring.

The general consensus is that, over time, practices will evolve and lessons will emerge so that the understanding and quality of submissions across different parties will converge towards a best practice.

Meet the Regulators Session

The historical need for regime change was due to an industry focus on commercial goals that drove poor product design in the market and did not add value for consumers. This was coupled with a “set and forget” mentality where there was little consideration of the changing financial needs of consumers over time, leading to poor customer outcomes.

DDO is not about more disclosure. It is about making insurers responsible for putting the focus back on the customer to ensure they get the best outcomes possible.

ASIC has been engaging with the industry during the past year and feels that the industry is stepping up and owning the reforms. The guidance is deliberately principle-based rather than prescriptive and ASIC has engaged significantly on technical issues and TMD templates with stakeholders.

ASIC expects issuers to take the TMD and personalise it, so there should be variation between issuers in the final determinations where their situations are distinct.

In future they expect issuers and distributors to work together to produce the best outcomes, especially as there is value in feedback and collaboration between these different parts of the ecosystem.

ASIC does not intend to have an approval role, but they will instead consider how issues and the guiding principles are being addressed. There will be a period of transition and ASIC will be satisfied provided participants are making every effort to comply. Where issues do arise, ASIC will want to see effort being made to make changes to behaviours. In essence, it is keen to take a long term view on the DDO.

Q&A with ASIC Panellists

During this session ASIC were asked a number of very specific, technical questions which have not been included here. One of the more general questions was what ASIC believes a “reasonable” approach looks like and how long this applies for. ASIC recognises that DDO is a step change and so the Day 1 approach will not necessarily be what it looks like in the future. Change will happen over a 2.5 year transition period. What is expected is that technical and inadvertent errors are?addressed as soon as possible. There will be flexibility with regards to the timing and ASIC will continue to communicate throughout this period, with a review expected in Q1 2022.

Overall this workshop provided an interesting snapshot of how the industry has been preparing for these changes. Whilst much work has been done, it is still early days and it is not yet transparent how issuers will change their product suite and marketing to adapt appropriately.

Time will tell if there are both winners and losers of the DDO regime, but hopefully it will be a win-win situation for organisations and customers alike.