ASIC's recent observations in relation to the Target Market Determinations ("TMD") of superannuation funds reiterates the importance for all licensees to review and improve the effectiveness of their TMDs.
A TMD is required to be implemented by any licensee who issues certain financial products to retail clients. TMDs must be clear, well-designed and include appropriate review triggers and controls.
A Summary of ASIC's Commentary
As part of ASIC's sample review of superannuation trustees' TMDs, it was found that some licensees are implementing poor practices. ASIC's commentary on the TMDs which formed part of their review stated that licensees should:
- Define the target market for the financial
product:
- ASIC noted that those licensees who defined their target market
in a specific manner, including factors like age, occupation or
industry, minimum investment balance, insurance needs (amongst
other things) demonstrated a better understanding of their product
and made it simpler for distributors to ensure distribution in line
with the TMD. ASIC's guidance included:
- ensuring the target market is defined against each of the key attributes of the product;
- ensuring the consumer objectives, financial situation and needs for which the product is likely to be appropriate are sufficiently covered by the TMD;
- clearly articulating each product and the differences between the products in TMDs that cover multiple products.
- ASIC noted that those licensees who defined their target market
in a specific manner, including factors like age, occupation or
industry, minimum investment balance, insurance needs (amongst
other things) demonstrated a better understanding of their product
and made it simpler for distributors to ensure distribution in line
with the TMD. ASIC's guidance included:
- Investment sub-markets:
- ASIC's commentary noted that describing objectives and risk levels of financial products in broad or non-numerical terms would not be considered effective. ASIC indicates that TMDs should include specific data, using quantifiable investment objectives or benchmarks to be effective.
- Review triggers:
- ASIC commented that review triggers should be specific and comparable over a set period of time and should not be overly broad.
- Ongoing review periods:
- Whilst licensees which formed part of ASIC's review included initial review periods in their TMDs, ASIC noted greater attention should be paid to setting ongoing review periods to ensure appropriateness of TMDs.
- Distributor complaint reporting:
- ASIC noted that TMDs should include regular complaint reporting to ensure licensees are informed about their product and assess whether the TMD remains appropriate.
ASIC's observations on the TMDs of superannuation trustees give us the first insight into how ASIC will assess TMDs generally across their regulated population. It is important that all issuers of financial products who are required to provide a TMD are aware of ASIC's guidance and look at reviewing and updating their existing TMDs and product governance arrangements.
Background:
The Design and Distribution Obligations (DDO) regime came into effect on 5 October 2021. The DDO applies to a range of financial products under the Corporations Act, ASIC Act 2001 (Cth) and the National Consumer Credit Protection Act 2009 (Cth) and are intended to help consumers obtain appropriate financial and credit products by requiring issuers and distributors to have a consumer-centric approach to designing and distributing products.
A TMD is a mandatory public document that sets out the types of clients a financial product is likely to be suitable for. A TMD also refers to a licensee's product distribution, monitoring and review of its financial product. This document is provided to clients free of charge prior to engaging in retail product distribution conduct.
Further Reading:
ASIC Media Release - Super trustees urged to improve effectiveness of target market determinations
DDO Enforcement: ASIC issues first DDO stop orders
Design and Distribution Regime
ASIC Regulatory Guide 274 - Product design and distribution obligations
