Product design and distribution: The consumer is key
One year into the DDO, companies need to keep their hands on the wheel to improve the design and distribution of their financial products, writes ASIC Deputy Chair Karen Chester.
The design and distribution obligations (DDO) regime recently marked its first full year in operation. It also marks a shift to outcomes-based regulation — in short, to know your customer outcomes.
Companies need to take a consumer-centric approach across a financial product’s lifecycle. Ultimately, this requires products to be designed and distributed with clear and contemporary consideration of the objectives, financial situation and needs of the consumers being targeted.
For boards, the regime is fundamental to managing non-financial risks and preventing many of the poor outcomes seen in recent years. Products that were the subject of several case studies in the banking Royal Commission would simply not have passed muster under DDO.
It is encouraging to see the work many firms have done to implement DDO, especially in developing target market determinations (TMDs) and simplifying unnecessarily complex products. However, the obligations are not 'set-and-forget'. Companies must monitor consumer outcomes to improve and refine the design and distribution of their financial products over time.
Focus on DDO compliance
Our regulatory focus has now shifted to compliance. Reducing the risk of harm to consumers — by bringing a DDO compliance lens across our work — is now a whole-of-ASIC priority. In many ways, it is our new 'business as usual'. You can expect us to initially focus on sectors at most risk of consumer harm. We have a number of targeted surveillances underway across sectors including BNPL (buy now, pay later), crypto products, credit cards, superannuation and managed investments.
We will ultimately review how product issuers interact with their distributors to confirm they are not straying beyond their target market. We will also review how they monitor and review consumer outcomes to ensure consumers are receiving products consistent with their likely objectives, financial situation and needs over time.
Where firms are not doing the right thing and there is potential for consumer harm, ASIC can now take quick action to disrupt poor conduct and prevent that harm. This includes ensuring the appropriate targeting and distribution of financial products, using stop orders or taking court-based enforcement action. We used our DDO stop order power for the first time in July, placing interim orders on three financial firms to prevent the sale of products to consumers in circumstances where they were not likely to be appropriate for those people.
Data is a must have
It is critical that companies get their TMDs and product governance settings right and have robust and meaningful data to test and monitor these settings. Firms must collect and understand data about the outcomes of their product distribution and who their products are getting to. You can ultimately expect us to look closely at the way firms do this. It is critical that organisations respond to any poor outcomes they identify by making the necessary changes to their products or distribution arrangements.
DDO has turned a new page in the regulation of financial products in Australia. The regime is intended to deliver better consumer outcomes and, ultimately, we want to see the long-term benefits of DDO being realised.
For more information on ASIC’s expectations on DDO compliance and our general approach to administering the obligations, refer to our Regulatory Guide 274 Product design and distribution obligations (RG 274).
This article was first published in AICD's Company Director magazine in November 2022.