Member Outcomes and Design & Distribution Obligations: An Opportunity for Efficiencies
On 15 December 2020, APRA & ASIC issued a letter to RSE licensees (RSELs) in relation to the Member Outcomes (MO) obligations and the Product Design and Distribution obligations (DDOs), to assist RSE licensees to better understand how the MO obligations and the DDOs interact.
APRA and ASIC note that these regulatory changes are transformative and will have substantial impacts on RSE licensee operations and product offerings.
Beyond compliance with these obligations, the regulators create greater understanding among RSE licensees and encourage efficiencies in systems and processes by considering the two regulatory regimes together. The letter builds on previous guidance issued by the two regulators on the MO obligations and DDOs.
This blog summarises the letter from the regulators and suggests how RSELs can respond in the best interests of their members.
Recap on member outcomes obligations
As covered in our previous blog on Superannuation Member Outcomes, APRA’s SPS 515 Strategic Planning and Member Outcomes requires RSELs to develop robust member outcomes assessments and embed these into their strategic planning processes.
APRA provides supporting guidance in SPG 515 Strategic and Business Planning and SPG 516 Business Performance Review.
The prudential standard requires RSELs to:
1. Set specific outcomes sought for beneficiaries and establish strategic objectives within the business plan to achieve them – to ensure strategic objectives are in the best financial interests of members.
2. Establish processes for decision making and monitoring of fund expenditure, particularly significant fund expenditure – RSELs are to show that all expenditure is in the best interests of members and the sound management of the business.
3. Conduct an annual outcomes assessment and factor results and learnings from this into future strategic plans – to identify how member benefits can improve and the mechanisms for implementing such improvements.
SPS 515 commenced on 1 January 2020. The first business performance reviews (BPRs) were due by 31 December 2020, and the first outcomes assessments will be completed in early 2021 and published by 31 March 2021.
Recap on design and distribution obligations
Our recent blog ‘New Product Design and Distribution Obligations. Are you ready?’ covers the key steps required to meet the requirements under DDOs in Pt 7.8A of the Corporations Act.
ASIC provides supporting guidance in RG 274 Product design and distribution obligations, released on 11 December 2020.
The key requirements under the DDOs are for financial product issuers (including RSELs) to:
· Make a target market determination (TMD) including a description of the target market for the product, distribution conditions and restrictions, and review triggers.
· Take reasonable steps in relation to distribution.
· Notify ASIC of ‘significant dealings’ in the financial product.
· Review the target market determination to ensure it remains appropriate.
· Keep records of TMD decisions, reviews, and distribution information.
For RSELs, though the DDOs exclude MySuper products, superannuation choice and retirement products are covered by the obligations. Therefore, comments in this blog on the interactions between the MO obligations and DDOs are primarily in relation to superannuation choice and retirement products.
The deadline for compliance with the DDOs is 5 October 2021 and requires much preparation in the lead up to the deadline.
How the two regulatory regimes interact
Given the almost coincidental commencement dates, APRA and ASIC see opportunities to benefit from on potential synergies through the implementation of each regime.
The letter to RSELs identifies the following similarities between the MO obligations and DDOs; obligations to:
· Identify the needs of members.
· Determine whether their decisions about choice products and broader business operations are delivering quality outcomes for members.
· Make decisions that are evidence-based and to monitor and review their product offerings and operations going forward.
There are three key areas in which the regulators believe the MO obligations and the DDOs interact closely:
1. Business planning, assessments, and review.
2. Data collection.
3. Insurance arrangements.
Business planning, assessments, and reviews
Both regimes require RSELs to make business decisions based on target outcomes for members.
Under member outcomes obligations, RSELs are to conduct annual outcomes assessments on different cohorts of members using relevant key performance indicators (KPIs).
Target markets determined on a product basis under the DDOs may be used to identify member cohorts for member outcomes obligations (noting cohort construction under MO must be more granular than product-based).
Assessment outcomes and subsequent amendments to the business plan may inform reviews of the target market determination under the DDOs to ensure it remains appropriate. For example, product changes addressed in strategic and business planning would need to be reflected in adjustments to the TMD.
Both regimes require the use of internal and external data to meet the obligations. This is explicitly stated by APRA for MO obligations and an implied requirement for the DDOs.
Under the DDOs, ASIC requires the development of a documented product governance framework covering all products on offer. This includes the collection and analysis of relevant and reliable consumer, product performance, value, and transaction and complaints data. RSELs will also need to consider data required from the product distributor to help identify whether the TMD requires review. This data can also inform annual outcomes assessments.
Further, the ongoing redevelopment and enhancement of KPIs under the MO obligations may prompt the re-evaluation of what range of data should be collected to monitor distribution activities and outcomes under the DDOs .
The potential costs and difficulty of capturing sufficient data for analysis are likely to ease as APRA rolls out its multi-year Superannuation Data Transformation program, aimed to enhance the breadth, depth, and quality of APRA’s superannuation data collection.
Insurance is a key feature of superannuation product design considered under both the MO obligations and DDOs.
RSELs need to ensure their insurance strategy and design is appropriate for their membership cohorts and assess the impact of insurance premiums on members’ retirement savings.
To help develop an appropriate insurance strategy, RSELs will need to collect information from their insurance provider that may also be useful to determine whether cover offered meets the needs of the target market (for DDOs) and achieves the outcomes sought for beneficiaries under the strategic objectives and business plan.
In the coming months, APRA and ASIC intend to continue engaging with the industry on the interaction between the MO obligations and DDOs.
It would be wise for RSELs to not implement the MO obligations and DDOs in isolation.
Capturing efficiencies is in the best interests of members and the RSEL. To effectively capture the synergies that may exist, co-ordinating implementation schedules and review timelines will help enable the use of analysis outcomes to inform decision making.
How we can help
If you need external support to meet the member outcomes and design and distribution obligations, we’re here to help. Our services in relation to these regimes include:
· Independent review of outcomes assessment frameworks and processes
· Drafting of business performance review reports and member outcomes assessments
· Independent review of strategic planning processes
· Developing and implementing tailored DDO frameworks
· Drafting of target market determinations
· Aligning policies and procedures to the DDO framework
· Compliance training for staff on each regime
To capture the potential benefits from the interaction of the MO obligations and DDOs, we can also review ongoing business processes under the two regimes to identify opportunities for added efficiency.
Contact us for a confidential, no-obligation consultation to discuss how we can support you through these regulatory changes.