Why ‘ask more questions’ is the wrong approach to DDO and what to do instead

From 5 October next year (less than 11 months away!), financial product issuers will be required to take reasonable steps to ensure that their products end up in the hands of people who will benefit from them. This is the first time that product issuers will REALLY be on the hook for what happens to people once they buy a financial product.

The legislation is called ‘product design and distribution obligations’ (DDO), and while the final regulations still haven’t been issued, the draft regs give us a pretty good idea of what’s going to be required.

There are many aspects to the new legislation, but one of the key ones (from the draft ASIC reg guide) is that:

“Distributors must take ‘reasonable steps’ to distribute financial products to the target market.”

Given the current onboarding process is an application form with lots of questions, it’s no surprise that many firms are thinking the way to solve this aspect is to simply ask more questions of consumers.

Unfortunately however, ASIC is pretty clear that asking consumers extra questions is not what they are looking for. ASIC says (quoting here again from the draft reg guide):

“The obligations do not equate to an individual product suitability test that requires assessment based on an individual’s personal circumstances at point-of-sale.”

While there are many times that I disagree with the regulator (anyone who knows me knows that I have an opinion – often contrary – about just about everything…), I do agree with ASIC on this one. For a couple of reasons.

Firstly, exactly what questions are you going to ask? ASIC has already said that asking someone if they are in the ‘target market’ is not going to cut the mustard.

So then maybe you add in extra questions about the person’s financial situation, etc, so that you (as the product provider) can decide if they are in the target market. But if you collect personal information about a client, they may well expect that you will take that information into account when you deal with them (did someone say personal advice!?).

And then even more problematic, the mechanism itself. If a platform has 1000 investment products, and each of those requires a different set of questions, how on earth is that actually going to work? In the real world? It’s easy to say ‘we’ll build an IT solution’, but time is ticking and fund managers don’t want to deal with 20 different solutions just to meet their compliance requirements.

So… if that’s not the approach, then what is?

We think there’s a different way to not only solve the DDO distribution riddle, but actually deliver an uptick in the quality of product decision making as a by-product! How? Through the magic of big data.

It’s pretty incredible the amount of information that can be gleaned from a name and address only. Retailers (food, fashion, cosmetics, etc) already know this and use this approach to understand their customers since they too rarely sell directly to their customers aside from online (where again, its name and address only).

As we all know, there’s no financial advice or AML when someone buys oven cleaner or golf clubs, so there’s little opportunity to ask pages and pages of additional questions that will help you learn about your customers.

And if you’re wondering just what sort of information can be put together from name and address only, we’re talking income levels, wealth, life stage, education levels, and a myriad of other information.

So how do you, as a product issuer, get access to this sort of information about your customers?

The answer is Wattletree

Wattletree is a new service (a joint venture between Mayflower and Marketsoft), that aggregates basic customer information from platforms, brokers, unit registries and more, and uses it to deliver quarterly TMD compliance reports to product issuers.

We are able to do this by using a combination of first party (owned customer data), ABS, and geo-demographic information to create a view of the ‘class’ of consumers in each product.

This approach allows for distributors (such as platforms) to enter their data once, and Wattletree will deliver product issuers (and distributors) a full view of their consumers.

Wattletree takes the guesswork out of the TMD (and wider product governance) process and allows issues to really know who their consumers are. Plus, for distributors, Wattletree provides a single (industry wide) solution rather than attempting to meet the needs of thousands of product issuers before 5 October 2021 (and then of course deal with legislation changes as they inevitably occur).

Wattletree will also provide trend information and breakdown by distributor/AFSL/broker/etc so issuers will be alerted if there are any significant differences between distributors or significant dealing on the horizon.

It’s not often that we get a chance as an industry to come together and make a step change across the board regarding how we understand consumers and build products for them. Wattletree is that change.

If you’d like to know more about Wattletree, or tell me I’m completely wrong about anything above (!) drop me a line - sarah@mayflower.com.au.