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Products and services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly.

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Principle 2: Product Suitability

 

What that means:

It is unfair to sell a product to a customer who has no need of it, or if it is too expensive for their budget.

An example of this would be selling a 35-year mortgage term to a customer who’s five years away from retirement or selling payday loans to a person who does not have a job.

Affordability plays a very big part here. Lenders must ensure that if you wish to borrow any amount of money that you can afford the repayments.

 

Introduction

Outcome 2 centers around product development. To ensure a fair outcome to customers, product should be developed for specific target markets and must be fair in their creation.

There are cases where the product design defeats the apparent purpose of the product. An example is where high and layered fee structures are imposed on investment products, making the likelihood of a positive return improbable. Even if these fees are disclosed, the customer may not understand the implication of this.

In other cases, contractual wording may be highly restrictive, and while customers may believe they have cover, the likelihood of a successful claim is very small. For example, in the case of health policies, the conditions covered may be highly obscure, while more common diseases and conditions are excluded. This type of product has the effect of creating a very small claims ratio, as many claims are rejected.

Customers can be broadly grouped into three categories:

• Low sophistication: Relatively inexperienced groups with a high level of dependence.
• Moderate sophistication: General consumer groups falling into the mass market.
• High sophistication: Investment groups who have expertise.

These customers have different needs and to address the different needs of these groups, product designers should be able to show that research and testing was conducted in product design.

The appropriate means of distribution must be identified based on the characteristics of both the product and the target customer group. It must be noted whether a newly developed product is an advice seeking product or not and whether the commission and/or fee is justifiable.

Product providers are responsible for the design and development of financial products and they must ensure that they have identified a particular customer group for which the product will be suitable for. Marketing and communication material must be developed to ensure that they are suitable for the product and the target market.

To design and market products correctly, the product provider must have measures in place to evaluate the customer groups’ financial understanding of products or services offered or provided to them.

It is imperative that financial service providers, staff, representatives, and 3rd parties understand the products that they market and how the benefits of the product match the needs of a specific customer group.

A financial service provider must perform due diligence on all the products they offer or intend to offer as well as on product suppliers. New products must be adequately researched to ensure that they are suitable to identified customer groups. It is also important that a financial services provider update their fact find to collect more information if moving into more complex products.

A product should not be marketed or advise given on such a product if the product is not understood fully by the financial services provider and the sales department.

It is advisable that a financial services provider follows the following procedure on all products offered to ensure that the requirements in terms of TCF outcome 2 are met:

• The financial services provider must identify the customer groups the product will be suitable for.
• The financial services provider must also assess the suitability of related and optional products and services for the identified customer group.
• The financial services provider must assess the suitability of promotional or other material for the identified customer group.
• Senior management must confirm that the product adequately meets the TCF outcomes, including the requirement that it will perform as customers are led to expect.
• Staff and representatives must be provided with information regarding which customer groups the product suits.
• It is imperative that the sales department staff and representatives attend all product training provided by the product supplier and update their knowledge on products regularly.
• Financial services providers must give the sales department and representatives a chance to evaluate all new products for fairness taking into consideration their customers’ needs.

It is the responsibility of the provider to develop pre-sale product literature that is fair, clear, and not misleading.

This should, at a minimum, provide advisers with clear, accurate and balanced product information, which includes:

• the target market for which the product is designed.
• aims, objectives, benefits, and features.
• risks, charges, limitations, or exclusions.
• what ongoing support will be provided to advisers?

With a clear understanding that some of this needs to be passed onto the customer.

FSP’s must still be very careful when choosing who to use to distribute their products and the platforms to ensure that the product is marketed to the right customer group.

Distributions channels and platforms should be monitored frequently to ensure that delivery via these does not prejudice the consumer unfairly.

FSP’s must have the following processes in place regarding review of products to ensure that the requirements under TCF outcome 2 are met and to enable the FSP’s to apply corrective measures should it be found that the outcome is not adequately met:

• Processes to evaluate and ensure customers’ understanding of the product and services marketed.
• Measures must be in place to identify and mitigate risks that a product or service may pose to particular customer groups.
• Sales are tracked to identify if products are sold in wrong markers.  Sales information must include how many of each product was sold and the customer categories to which they were sold and not merely collate the number of sales made.
• If products are sold in the wrong markets corrective and preventive measures should be taken to avoid this from continuing.
• The monitoring of complaints to assess if the requirements under TCF outcome 2 are met.
• Providing feedback to the product developer regarding the suitability of the product for the intended customer group.
• The ongoing review and evaluation of products to ensure that all the objectives of outcome 2 are met.
• Measures to identify specific risks in the business that could impact on the ability to deliver TCF outcome 2, and actively managing these risks as part of the risk management framework.

FSP’s must be able to provide concrete examples, supported by management information, of improvement in the extent to which they are delivering Outcome 2 to their customers.

Evidence of Outcome 2 being implemented:

• A proper due diligence process is required with sufficient data to show that TCF has been a focus of the design. elements such as how the target market was identified, product structure, fees, transparency, and product integrity must be checked and confirmed TCF compliant;
• Feedback or information sessions where advisors provide important input into product design;
• Approval process on product wording and literature.