ASIC is calling on superannuation trustees to review and if necessary improve the effectiveness of target market determinations (TMD) for their products, after a sample review of trustee compliance found some poor practices.
TMDs are an important requirement for all financial products under the new design and distribution obligations (DDOs). A TMD is a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (the target market), and settings relevant to the product’s distribution, monitoring and review.
ASIC reviewed a sample of 55 TMDs prepared by 27 superannuation trustees across the industry, retail, corporate and public sectors for both accumulation and retirement products.
‘The design and distribution obligations were introduced to improve consumer outcomes,’ ASIC Commissioner Danielle Press said. ‘As product issuers, it is the fundamental responsibility of trustees to know their product offering and who it is right for. Trustees should clearly define their target markets and review triggers in target market determinations using objective, specific and measurable parameters.
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‘Clear target market determinations with appropriate underlying review triggers and controls, point to a trustee’s sound understanding of their product and the design and distribution obligations.
‘Some of the target market determinations that we looked at gave us comfort that they may be part of a well-designed and comprehensive governance program. However, others by their lack of specificity, raised questions about the underlying arrangements that trustees have in place to ensure their products reach the right consumers,’ Ms Press said.
- Defining target markets: All the TMDs reviewed by ASIC described target markets. Some trustees demonstrated better insight into their products by defining their intended market using specific parameters such as age, occupation or industry, minimum investment balance for retirement products and insurance needs. This approach would make it easier for distributors to confidently determine who the product is appropriate for. Some others used descriptions of consumer classes that were too broad to be meaningful, e.g. ‘those wishing to save for retirement’. We recommend that trustees:
- clearly define the intended target market against the product and its key attributes.
- when describing classes of consumers as being ‘potentially in the target market’, sufficiently cover the factors indicating product suitability for the relevant consumers; and
- clearly articulate the target market for each product and the differences between the products in TMDs that cover multiple products.
- Describing investment sub-markets: Over 80% of the TMDs described elements of the submarkets for their investment options, including objectives, risk level and minimum timeframes. However, there were some broad objectives and non-numerical timeframes, e.g. ‘high-growth’ or ‘long-term’. To be effective, investment sub-markets should be specific and comparable, using quantifiable investment objectives or identifiable benchmarks and commonly adopted measures (e.g. the Standard Risk Measure), with the minimum timeframe for each investment option expressed in years. These elements should be consistent with other documents about the product, such as the product disclosure statement.
- Setting review triggers: Some trustees adopted consumer-centric review triggers that were specific and comparable over a set period of time, such as:
- investment switching or insurance cancellations;
- member movement in or out of the product; and
- investment performance, including APRA’s Choice Heatmap.
However, some review triggers were broad and not specific enough to determine when a review of the TMD would be triggered, e.g. ‘persistent’ level of complaints or ‘significant’ member movement. We recommend trustees consider how insights from complying with their Member Outcomes (MO) obligations (the annual Outcomes Assessment and Business Performance Reviews) are incorporated into their review triggers.
- Setting review periods: Most trustees nominated initial TMD review periods of up to one year. However, trustees need to give more attention to ongoing review periods – nearly half of them set two or three-year periods for ongoing reviews. Review periods are an additional prompt for trustees to check if their TMDs are still appropriate. We recommend trustees use annual review periods to utilise the insights obtained from their MO obligations.
- Distributor complaint reporting: Regular complaint reporting is designed to allow trustees to stay informed about their product and to assess whether the TMD remains appropriate. We found 82% of the TMDs required distributors to report complaints in periods of three months or less. The remainder had reporting periods of either six or 12 months.
Commissioner Press said, ‘We expect all trustees to consider these observations when reviewing their target market determinations. Trustees are strongly encouraged to focus on clarity and specificity to ensure these documents are fit-for-purpose.
‘Trustees must not adopt a ‘set and forget’ approach to their target market determinations. Failure to review them regularly and take corrective action can result in harm if the product is inconsistent with the objectives, financial situation and needs of consumers in the target market. ASIC is now focussing on compliance with the design and distribution obligations, and we will move to enforce the obligations where necessary,’ Ms Press said.
DDOs require firms to design financial products to meet the needs of consumers and to distribute their products in a more targeted manner. The obligations apply to choice superannuation products, which can only be acquired by consumers actively choosing their product. They do not apply to MySuper products, defined benefit interests, or superannuation products that are no longer for issue or sale. Trustees are required to produce TMDs for choice superannuation products offered after DDOs commenced on 5 October 2021.
Regulatory Guide 274 Product design and distribution obligations (RG 274) outlines ASIC’s general approach to administering the obligations and expectations for compliance. On 15 December 2020, ASIC and APRA issued a joint letter to RSE licensees to explain the synergies between MO obligations and DDOs.