As part of the Design and Distribution Obligations (DDO), which came into effect in October 2021, financial planners are required to have Target Market Determinations (TMD) for clients as part of their advice obligations. A TMD describes who the product may be suitable for, based on their likely needs, objectives, and financial situation.

In this podcast, David Barrett, Head of Macquarie Technical Services joins Ben Marshan, Head of Policy, Innovation & Strategy, FPA to discuss what is a Target Market Determination (TMD), why they were introduced, the role and obligations of financial planners with TMDs, how to develop a TMD template, how to adhere to TMD requirements and ongoing obligations.

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Transcript

Ben Marshan 

Hi, FPA members. Welcome to this week’s podcast. Today, we’re going to be talking about Target Market Determinations and the design and distribution obligations. These came into effect in October 2021, as you’re probably well aware, and financial planners are required to consider the Target Market Determination for clients as part of the information that they consider in thinking about whether or not the products are appropriate and in the best interest of the clients when they’re implementing the strategies and recommendations that they have designed to achieve the client’s goals and objectives. The Target Market Determinations are something that help describe who a product is suitable for in terms of how it’s distributed, what are the objectives of the product, and what kind of clients’ financial situations are appropriate for those types of products.

In this podcast, we’re going to examine what Target Market Determinations are, why they were introduced, and what’s their role, how you adhere to the requirements, and how to develop an effective Target Market Determination process within your financial planning practice. Today, I’m joined by David Barrett, who comes to us from Macquarie. Welcome, David.

David Barrett

Thanks, Ben. Good morning.

Ben Marshan

Can I just ask you to introduce yourself to the members and a bit about your role and why you are here to talk to us today?

David Barrett

Yeah, sure. I’ve been with Macquarie Bank originally since 1997, so long-term employee. Currently, I’m a part of the Macquarie Private Bank operation, working in the advice product area. Still very focused on the sort of more technical side of super tax law, social security. But more recently, been much more involved in the advice side of things. In particular, I was responsible for the implementation of the DDO regime for the private bank as a distributor of products.

Ben Marshan

So, Target Market Determinations have caused a fair amount of angst amongst our members is probably safe to say. But from my perspective, when the government was considering the implementation of the design and distribution obligations in creating these Target Market Determinations, there was a really logical reason why they were looking to bring them in. Product disclosure statements are very difficult for consumers to understand and not particularly a client-friendly type of document. I think even short one PDFs haven’t really achieved what the types of consumer protection and client understanding that we were looking for. So, design and distribution, Target Market Determinations were probably a good step in the evolution of improving consumer understanding. But just taking a step back, in your view and in your experience and through creating these for Macquarie, what is a Target Market Determination?

David Barrett

Yeah, sure. Look, quite literally, a Target Market Determination is a document that’s required to be produced and offered on a public basis by the product issuer for primarily the benefit of product distributors. So, there’s two key concepts, I think, within the DDO provisions that the concept of a product issuer, a fund manager, an insurer, a bank, that actually manufactures the products and offers the products at a first level. And then there’s product distributors that are more likely to be actually in contact with the end user of the product. So typically, we’re talking about financial advisors, licensees, et cetera, brokers in some cases.

So, the idea of the Target Market Determination is a document that informs the product distributor of the product issuer’s view of what the target market is for the product that they’ve designed. So, it puts an onus on the product issuer to think about the design of the product and who the target market is, and then convey that concept to the product distributor. And then the onus becomes on the product distributor to take reasonable steps to make sure in general that the product distribution is to that target market.

Ben Marshan

Which makes a lot of sense, right? Because from a financial planner’s perspective, there are tens of thousands of products out there, and it can be difficult from reading product disclosure statements and marketing information about why a product was potentially developed and who the right kinds of clients for those products are. They’re glossy and they’re trying to sell the products and give you all the whiz-bang features, but understanding this product is right for a specific type of client in specific circumstances is useful information for making sure that the right kinds of products are recommended to the right kinds of clients. But again, going back to the history a little bit, why do you think Target Market Determinations were introduced?

David Barrett

It was to address the issue at the time, and currently it’s the case, that there’s a very heavy focus on disclosure by product issuers to the end consumers. And what we see is very word-heavy product disclosure statements, we see very word-heavy SOAs and the like.

The criticism I think was that consumers were disengaged with product disclosure statements in particular because of the wordiness. They still weren’t necessarily going to be able to get across the complexity of products, just by reading a product disclosure statement based on levels of financial literacy. And then it doesn’t necessarily overcome any behavioural biases. And if you take out the financial advice side of things, we know that 90% of Australian consumers are not receiving financial advice, then there’s a real problem there with a disclosure only regime. So DDO’s really been introduced to put the onus back on the product issuers and the product distributors to take responsibility that the product at a higher level than what you would have with personal advice, whether the product is suitable for the client before it’s actually distributed.

Ben Marshan

Yeah. I mean, while it was only introduced in 2021, I mean, this is something that, from my recollection, was recommended as far back as 2014, 2015, when the financial service inquiry came through.

David Barrett

That’s right.

Ben Marshan

So, there’s been a lot of conversation about these coming. I think from our members’ perspective, it seemed rushed at the end, and it seemed to come very quickly and out of nowhere. But I think… I’m not sure what your engagement was with the treasury and ASIC processes to get the legislation implemented, but I know certainly I was working on DDO and Target Market Determination regulation for maybe two or three years before it actually got implemented. Were you involved much in the process of legislation and regulation coming through?

David Barrett

Not so much in the development of the legislation, but certainly, I think the industry as a whole really sat back and was waiting for the ASIC guidance before it started to try and really understand and comprehend the DDO provisions themselves. It was a long period in its genesis, and we did have that six month delay from April 2021 to October 2021, but it did feel very rushed. There’s probably criticism that could be thrown at the industry. But at the end of the day, I think the industry did get there. And from our perspective, it seemed like a really, quite an onerous sort of task to take on at the beginning of the process. But when we finally got there on the 5th of October, it wasn’t nearly as hard as we thought it might be. The implementation of it in the end, we took a fairly minimal sort of approach to it. And as it turns out, that was probably the right approach, I think, in trying.

Ben Marshan

What’s the role of financial planners in this design and distribution obligation and in relation to Target Market Determinations in particular? You talked about the purpose of the document is to assist distributors of products. It’s not a term we like as financial planners, but ultimately, clients have to be recommended a product and are assisted in the application process, and so the technical term within the legislation is distribution. Where do planners fit in this framework? Why are we in there?

David Barrett

There’s probably two ways of looking at DDO from a planner perspective. There’s the distribution, the word that we don’t like, that occurs as a result of personal advice, and there’s other distribution of products. So typically, that’s going to come from either as a result of general advice being provided to a client or execution only services. So, the two are quite different, given that there’s a recognition within the provisions, that the provision of personal advice is a process that’s much more likely to meet the client’s needs to the financial product than DDO can ever hope to achieve with its sort of big picture focus on taking responsibility for the design of the product and being right for the client on a basis of a product issuer’s Target Market Determination.

So, there is quite understandably carve-outs in the provisions where personal advice has been provided. So, it’s worth sort of just thinking about it in that way, that if personal advice has been provided, then realistically, the obligations are, in ASIC’s view at least, to consider the Target Market Determination. That’s as part of meeting best interest duty and forming a basis of advice.

So, it’s another document in what would be a number of documents that an advisor would normally look at in determining whether a product is right for the client. It doesn’t hold any particular priority in that queue. It’s just something that should be considered in ASIC’s view.

So, the approach that we’ve taken to that is to simply require the advisors to consult the Target Market Determination and file note that they looked at it and actually make a call. Although it’s not required, we were asking our advisors to make a call as to whether or not the client is within the target market to determine that. That helps with the reporting.

Now, it’s interesting that with the non-personal advice distribution, you can’t distribute if a Target Market Determination doesn’t exist for an in-scope product. Whereas with the personal advice side of things, if the Target Market Determination doesn’t exist, it doesn’t preclude you from distributing the product. So, there’s a carve-out for that as well.

Ben Marshan

Yeah. I think that’s an important thing for members to kind of understand is that the Target Market Determination from their perspective is there to provide them with information about whether or not the product’s going to meet the client’s goals and objectives and improve their financial position and it’s appropriate for the client. Irrespective of what the Target Market Determination actually says, you can still be recommending those products, because there’s no obligation to, again, I hate the word, but distribute within the target market. But where you are, there are some obligations that kind of come through from that kind of scenario. Can you explain those, David?

David Barrett

Yeah. Regardless of whether it’s personal advice related distribution or otherwise, you have reporting requirements. The reporting requirements are a key feature of the whole DDO regime. It completes the loop. So, if you’d like to think of it as the product issuer provides information to the distributor by the TMD, and the distributor uses that information to try and match the product with the clients. If there’s any problem with that process, then there’s reporting obligations on the distributor back to the product issuer that distribution might have occurred outside the target market. In particular, there’s a regulatory requirement to report significant dealings that are outside the target market within a certain timeframe.

But the other aspect in that particular aspect is some product issuers are asking of the distributors to report any dealings that are outside the target market. Now, that’s a case by case scenario. Some are, some aren’t. So, you actually need to look at each individual Target Market Determination to determine what your reporting obligations are. And for managed funds, that’s the key one that’s sort of discretionary and pops up from time to time. There’s not much else in terms of reporting, other than complaints, significant dealings. And then the optional one is this non-significant dealings that are outside target market that you need to check as to whether you’re required to.

Ben Marshan

I’d like to dive into the significance part of it just quickly. But just to remind members that there was a lot of confusion, as you mentioned, David. There was a rush towards the end with ASIC getting out the regulatory guidance, and there had been this concept of new complaints reporting data having to come back to products at one time. And the FPA advocated very strongly with treasury and ASIC to get that removed, which we were ultimately successful in doing. Because having to regularly report… Some products, it was on a quarterly basis. That you’d had no complaints from consumers about those products was going to be a massive administrative burden.

But one of the things that members kind of are struggling a little bit to get their head around is this term, significant. I think there’s a difference between significant from a financial planner’s perspective in dealing with one individual client, and significance from a products perspective in terms of the whole cohort of people who are invested into those products. From your perspective and understanding, what is the significance test and where does it really apply?

David Barrett

Yeah. Look, I don’t know that any of us are any wiser on this issue. It’s one that some of the Target Market Determinations that you come across give you a bit of guidance. But I think that is just guidance. It really comes down to each individual licensee as a distributor or financial advisor as a distributor to determine what they think is significant.

To your point, there is, I think very clearly, a difference in significance dealings from the product issuer’s perspective from the distributor’s perspective. So, it’s relative to the total distribution that you have as an advisor as to whether any particular transaction is significant or not.

Some of the guidance sort of suggests that if one particular transaction is 50% or more of your total distribution for that period, then it would be significant. That’s an interesting concept, because as you’re aware, Ben, I’m sure, that you’re required to report significant dealings on a statutory basis within 10 business days of becoming aware that it’s a significant dealing. Now, if you have to wait until the end of the period to determine what your total dealings are, and then whether or not a particular transaction meets the 50% threshold, then you won’t be aware that’s significant until the end of the reporting period. Which is convenient because you do all the rest of your reporting at the end of the reporting period, and you don’t have to report that transaction within 10 business days of it actually occurring, because you won’t know whether it’s significant or not until the end of the period. So, there is some solace in that particular way of looking at it.

But then I do feel that a hard and fast 50% rule is probably not the be all and end all. I think you might need to think about certain one-off transactions that might be… I mean, you’ve had a lot of transactions and you had one transaction that was 40% and all your other transactions are 2% or 3% or something like that, then you may be tempted to think that that 30% or 40% transaction is a significant dealing as well. So, I wouldn’t be necessarily hanging my hat on a 50% rule as being significant.

Ben Marshan

I think from the conversations I’ve had through the FSC and with a lot of products around these significant tests, from most of the big product manufacturers’ perspectives, there’s nothing that a planner will ultimately recommend that will actually tip their significance reporting obligations off. Because financial planners generally, on a client by client basis, are recommending such a small proportion of the ultimate funds that are within that investment, that they’re unlikely to get to a significant threshold that the product would need to consider.

But there is useful information sometimes in whether or not a particular product is being recommended to clients in a particular way to suit particular purposes. And maybe that will change the way that a product needs to be designed and built and managed going forwards. So, there are cases… To your point, sometimes there is a threshold of 50%. Sometimes it’s higher, sometimes it’s lower in some of these Target Market Determinations, so the products can understand.

But I think the other point is we were in a process of waiting for ASIC to provide guidance, products were having to make decisions. A lot of this is still being worked out and figured out. And what’s in the Target Market Determinations today might not be what’s in the second or third iterations of Target Market Determinations going forward in relations to significance.

David Barrett

Well, I think that’s a very important point, that ASIC is really very much in a consultative sort of phase with the regulation of DDO at this point in time. Although, I do understand they’re starting to do a bit more surveillance of market activity in this space as we speak.

Ben Marshan

Yeah. Yeah, absolutely. And ASIC, to their credit, any time I had questions or any time I wanted to clarify things on behalf of members, were very, very open to having conversations and understanding how Target Market Determinations and DDO was affecting planners and their interactions with clients.

The other important reporting obligation around Target Market Determinations is in relation to complaints. Planners, I think on the whole, don’t get a lot of complaints from their clients about anything, really. And those sort of numbers are coming through from AFCA, AFCA complaints data and things like that. But there is a reporting obligation specifically in relation to Target Market Determinations. Can you explain what that complaints reporting obligation looks like and entails? What should planners be thinking about there?

David Barrett

With regards to complaints?

Ben Marshan

Yeah.

David Barrett

So, there’s a statutory requirement to report back to the product issuer of any complaints in relation to the product. And to your point, I mean, our experience, we’re yet to have a complaint that we’ve needed to report back to a product issuer. Our experience generally is that if complaints are coming through, they tend to be about advice more than the product itself, more than the complaint about the product. I think that’s probably the challenge. If you do have complaints from clients, that you need to look closely at it and determine, “Well, what is the actual complaint about? Is it really a complaint about the product, which needs to be reported? Or is it really about the advice that was provided, which wouldn’t need to be reported back to the product issuer?”

Ben Marshan

I was going to say… Yeah, so if a client comes and says, “I’m not happy with something,” or, “I want to complain about something,” you’ve now got to think about more things. You’ve got to think about, “Is it a complaint about the product?” And if it’s a complaint about the product, is it that the information in the Target Market Determination may not have clearly explained who the product was aimed for and what it was designed to do? Or is it a complaint about performance, which probably actually doesn’t necessarily fit within that Target Market Determination complaint framework? Although, some products want that information and others don’t.

Is the complaint about the advice? Those complaints are becoming few and far between. Or is the complaint about the services that the planner is providing? And how those are all dealt with are very different. So, you need to think about how all of that comes together now when the client actually comes to you and says, “I have a complaint.”

David, I know you said you’ve gotten a process on the financial planner side within Macquarie and you’re requiring file noting of consideration of the Target Market Determination. What sort of things should planners be thinking about in terms of considering the Target Market Determination, thinking about, or they might note that they’ve considered or otherwise from a best practice perspective?

David Barrett

We’ve got a process where we ask the advisors to determine whether the clients within the target market or not. If the client’s outside the target market, they’re required to escalate. If they want to proceed with the transaction, then it would be escalated for authorization. That’s typically approved, where personal advice has been provided.

The issue then is I find a lot of advisors are incorrectly assuming the clients are outside of the target markets and missing the so-called diversification clause that I like to call it. It’s often within some of the managed funds, Target Market Determinations. So that’s a key aspect of a Target Market Determination to focus and look for that diversification clause. That’s the first thing I really look for when I look at a Target Market Determination.

If it’s there, then with managed funds, if it’s a growth fund and you’ve got a balance or a conservative profile, then that allows you to determine that the client’s within the target market. Because the diversification clause allows it, as long as you’ve got a small enough allocation to that particular product that fits the requirements within the Target Market Determination. So, I think that’s the key thing to look for. You don’t have a problem if a diversification clause is in there.

The next point to look for in the reporting process is whether or not the issuer is requiring you to report all outside target market transactions. And often, they’re not requiring it. It’s optional for them, and often they’re not.

So, when you go through that two step process, what we’re finding is very, very low numbers of reports required to the issuers of transactions that are outside target market. We haven’t had one yet that we’ve considered significant. All of our reporting is just non-significant outside target market distribution, where it’s required to be reported by the particular product issuer, which is few and far between. We’re getting reports going to single figure numbers of product issuers.

Ben Marshan

Yeah, and I think that’s the important thing for members to be conscious of. There are very few circumstances. When you understand your client, when you understand their goals and objectives, when you consider the right strategies for them, when you put together a portfolio of products and investments to meet those goals and objectives in their best interest, there’s going to be very few situations where the client… You are recommending a product and implementing a product for a client, where they’re going to be outside the target market, but more importantly, in a significant way.

I think the comment you just made about the diversification clause is something that I think covers you most of the time. Even if it’s not there, if you have a particular objective for the client that you are trying to address that, that type of product is appropriate for, then it won’t be a significant dealing outside of that target market.

So, the obvious case is you have a conservative investor, but maybe they’ve got a long term goal that in 20 years time, they want to leave some money for their kids or they want to leave some money for their grandchildren, and a growth type product is more appropriate in that instance. If they have a goal and they have an objective to grow a pool of money or a long period of time, a growth investment is appropriate in that circumstance. So, in that circumstance, you wouldn’t need to recommend that they’re outside the Target Market Determination, because for that portion of the client’s investible assets, they’re not.

So, it’s important to go to that kind of next step. Don’t just look at the fact that you’ve got a conservative risk profile growth product. You have to think about the whole spectrum of the advice you’re providing to the client.

David Barrett

Yeah, I agree with that logic in theory. I think you’ll find that when you look closely at the Target Market Determinations, it’s sometimes difficult to have that interpretation when you look at the literal interpretation of the words within the Target Market Determination. So yeah, I’m aware of that view. I just find it a little bit difficult, from a compliance perspective, to necessarily adopt that view, because of the risk of a literal interpretation of the Target Market Determination being applied.

Ben Marshan

Fair enough. I’d also mention that… I mean, in the scheme of things, there are a lot of products out there. So, if you find one Target Market Determination isn’t allowing you to make the recommendation for your client that you might otherwise want to, there are other ones out there as well.

David Barrett

This is an issue where a little bit of guidance would go a long way. I mean, some sort of comment from ASIC along those sorts of lines that you were saying would be really helpful for the industry to clarify that particular point.

Ben Marshan

Yeah, absolutely. And we’d certainly love to have those conversations with ASIC. And to the FSC’s credit, they’ve put together a bit of guidance note for financial planners that helps explain the significance test as well, which we’ll look to remind members that it’s out there. David, was there anything else you wanted to cover off in terms of design and distribution and Target Market Determinations?

David Barrett

No, only the issue around the governance requirements, a governance program. I think that’s going to be key. I’m sure ASIC’s probably not going to be necessarily having too much focus on smaller distributors, smaller licensees, but certainly for the larger licensees. I think the first thing they’re going to look at when they’re looking to see how an organization has complied with the DDO obligations is to look to what governance documentation there is in place. So, I would encourage all licensees to ensure that they’ve got that document there available and demonstrating what their process are going to be around DDO. It’s a useful process to go through, putting together a governance document. But I think it’s going to be critical if there’s any surveillance of an organization

Ben Marshan

Yeah, absolutely. I think just to bring it down to practical levels, within your compliance framework and within your advice process, the Target Market Determinations are an important piece of information to be considering about when you recommend the particular product to a client. So having a documented process where you consider the Target Market Determination then and either record that you have looked at this or keep a copy of it, or however you choose to manage that process, is something that’s important from a governance perspective that if ASIC starts to look at your licensee and starts to do an order of your licensee, having that within your processes becomes something that’s incredibly important.

Ben Marshan

Thank you, David, for your time today, and for sharing your expertise and knowledge around Target Market Determinations and design distribution obligations with members. If members want to find out more information, is there anywhere in particular that you would point them to?

David Barrett

Look, I think the ASIC guidance is worthwhile. That’s maybe a bridge too far for some advisors, but there is plenty of guidance. We’ve produced a couple of articles that have been published. I think one’s by the FPA, just a high level sort of summary of what DDO is involved in. Worth reading those sorts of commentaries. And then just looking at the ASIC guidance, I think, would be the second level to go to once you’re looking for a bit more detail.

Ben Marshan

I know ASIC put out some FAQs within the financial advice information hub as well around Target Market Determinations. And otherwise, members, you can have a look at the guidance that I did up for you in relation to Target Market Determinations and how those operate as some nice easy videos for you to get your head around how all of that works. Thank you, David. Appreciate you joining us today on the podcast

David Barrett

Thank you. Thanks for the opportunity and appreciate being involved in this.

Ben Marshan

No worries. Thank you. And thank you, members, for listening in. We will have another episode of the FPA Podcast coming out shortly. Have a great day.

 

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