By guest contributor Simon Russell, Director, Behavioural Finance Australia
The new product design and distribution obligations are due to come into effect in October 2021. If your organisation issues or distributes investment or credit products, now is your chance to prepare. The obligations will apply to a range of financial products, including investments, super, insurance and various credit products. The obligations are particularly relevant for super funds, investment product providers, banks, credit unions and insurers, among others. They appear to indirectly impact financial advisers and mortgage brokers too.
This article is the second in a 4-part series that discusses what you need to know about behavioural finance and associated decision-making research to implement these new requirements successfully.
How can you use questions to understand consumer needs?
According to ASIC, the new design and distribution obligations will require issuers to ‘design financial products that are likely to be consistent with the likely objectives, financial situation and needs of the consumers for whom they are intended’. But how can issuers know what consumers’ objectives, financial situations and needs are … or what they like or dislike … or what they understand or don’t understand? Perhaps the best approach is simply to ask them.
Unfortunately, as ASIC points out and the decision-making research confirms, there can be severe limitations in attempting to do this. You can’t simply ask people if they understand a product and expect to get a reliable answer. For a start, they might not be aware whether they understand it, resulting in them saying ‘yes’ when the real answer is ‘no’. And, as ASIC points out, if the consumer purchased the product previously, that’s not a sufficient indication that they understand the product either.
And you can’t ask how satisfied a consumer is either. ASIC research demonstrates that this too is an unreliable guide to whether a product is suitable. For example, ASIC’s own shadow shopping research with real consumers who sought retirement advice ‘identified a large gap between the technical quality of the advice (as assessed by ASIC) and the consumers’ own assessment of that advice.’ As ASIC puts it ‘consumer detriment may be apparent to consumers or be hidden’.
Neither can you ask consumers to self-certify that they are in the ‘target market’ for the product – ASIC says that is not sufficient either. And asking about their risk preferences and their goals and objectives is also a tricky business that is beset with psychological traps, as I’ve discussed in detail in my most recent book. As a result of different biases, a client can claim they are a long-term investor who is not frightened by short-term market volatility and yet still panic and switch their investments to cash in response to a market correction.