From banking to superannuation, investment management to financial advice, the design and distribution obligations (DDOs) legislation will disrupt a large proportion of the financial services landscape in Australia.
Announced in 2019 and set to take effect in October of this year, the DDOs are the latest in a shift towards more customer-centric regulation and guidance handed down by ASIC, the origins of which can be linked to the findings and implications of the Financial Services Royal Commission.
The DDOs, at their most basic, require organisations to place their customers at the heart of product governance and design and distribute their products and services around meeting and exceeding their customer’s expectations.
Whilst these regulations have already placed significant pressure on the financial services industry, they also represent an opportunity for many brands in the sector to take responsibility for their actions, rehabilitate their damaged reputations, and rebalance the trust equation with customers.
The DDOs will create a fundamental shift in how products are designed and distributed to retail customers. No longer will product issuers and distributors be able to assume that basic product disclosure is helping their customers to make informed decisions in the increasingly complex financial services environment.
There are a few critical brand strategy implications of the DDOs that financial services brands need to be aware of;
The main component of the DDOs is the introduction of a target market determination (TMD). It is the first step in the obligations, and it is crucial as every subsequent component of the DDOs are dependent on it. There is also considerable effort required to get it right.
A TMD requires an organisation to describe the likely objectives, financial situation and needs of customers in a target market. The products features must be described, and the organisation needs to clearly explain why the product is likely to meet the needs of the specific customer market.
Brands in financial services will need to have a deep understanding of their customers – based on structured and well-articulated research, behavioural economics, analytics and enhanced segmentation. It is now not good enough to rely on generalist psychology and more basic personas, especially as customer needs continue to change over time.
Investing in a robust TMD research approach in the short term will allow financial services brands to reap rewards over the long term. Knowing and understanding customers is more critical than ever, which should place an enormous priority on market and customer research, helping to understand why customers choose a brand and products over an alternative.
Once the TMD is completed, the distribution of each product must also be revisited to ensure that it aligns with customer’s expectations.
Traditionally, many financial services products have been marketed towards the masses in order to build wider awareness and attract sales. The DDOs stipulate that they now need to be marketed towards specific channels that align with a specific target market.
Brands and their products are now also required to be clearer and easier to navigate, which will hopefully allow prospective customers to make better and more informed decisions about a product that is right for them. This has significant repercussions for the brand’s product architecture in its existing portfolio; does it support or hinder customer choices, does it make it easier or more difficult for the right product to reach the right customer?
The existing regulations surrounding financial services products have also been criticised because they do not support customers when they are seeking to switch to a different or more suitable product. It is also difficult for customers to understand the unused features that they have not been accessing. With the new DDOs, this is also set to change, with distribution now simplifying the product offering and making it easier to leave if the customer chooses to.
The final component of the DDOs is designed to ensure that performance is monitored to improve the entire system over the long term. This centres around how complaints, feedback and priorities are managed by financial services institutions, the data of which is now reported and analysed by independent operators.
Brands in the sector will now have to front up, resolve complaints and respond to feedback in a way that solves the root cause of the issue across the entire target market. This has repercussions for culture in an industry that had once previously lacked transparency and prioritised profits over people.
To meet and exceed beyond basic compliance with the DDOs there are three specific priorities for financial services brands:
Before the announcement of the new DDOs, financial services organisations had been maligned at the Financial Services Royal Commission for their inwardly focused remuneration schemes that prioritised sales and profit over customer benefit.
The DDOs should be seen as the clearest piece of evidence that the regulators are going to manage this ‘win at all costs’ culture and place the responsibility back on brands to rebuild trust in the sector.
With so much riding on these regulations, it appears the industry is aligned and now ready to embrace this level of change. For example, we have already witnessed throughout the past 12 months of economic downturn, a more sensitive and customer-centric approach from the Big 4 Banks who have supported Australians throughout the pandemic. Acting as a major shock absorber, their actions have included mortgage loan deferrals, reductions in repayment amounts and decreasing variable home loan rates, to name a few. This suite of short-term measures provided assistance for customers who had been put into financial hardship through no fault of their own.
For brands in the financial services sector, this is the type of work they will need to continue to do. To truly deliver to the specific DDO regulations, and then to exceed beyond basic compliance, financial services organisations will need to think holistically and embrace the changes to rehabilitate their image and re-establish trust amongst the wider public.