Too many documents: brokers criticise TMDs as reform bites

Brokers have raised concerns that new Target Market Determination (TMD) documents are confusing consumers and that different approaches from insurers have added to the complexity.

TMDs were introduced as part of the Design and Distribution Obligations (DDO) in October last year, following recommendations from the Hayne royal commission. The reform aims to make sure financial products are consistent with the needs of consumers who buy them.

But the broking community is worried that consumers don’t know what the new documents are, and might struggle to read and understand them as has been the case with product disclosure statements.

However, consumer groups argue that the reform was never designed as a disclosure tool – rather as an obligation on insurers to design products appropriately. The documents are provided to consumers purely for transparency, they say.

Principal Solicitor at Radford Lawyers Mark Radford flagged the issue at the National Insurance Brokers Association (NIBA) convention in Sydney.

“I don’t think there is going to be anyone in this room that looks at the PDS obligations, the horrific TMD obligations, which are ridiculous, and thinks they work for the consumer,” he said.

“The concepts behind them are sound, which is to ensure the suitability of the products the consumers are getting. The way it was implemented post royal commission is horrific and you’d need a legal degree to even get your head around most of it.

“If anyone can put their hands up and say they understand what the TMDs of the insurers are saying I’ll be impressed.”

NIBA CEO Phil Kewin told insuranceNEWS.com.au that it is “questionable” whether the reform is benefiting consumers and called for a review to establish its effectiveness.

“The intent was right but I think it is fair to say the jury is still out on whether TMDs are achieving their purpose,” he said.

“The lack of consistency from company to company has created unnecessary confusion even where the products may be similar.

“Admitting it is still early days, our view is that there should at some stage be a review of DDO to assess whether they are achieving their intended purpose.”

One senior broking source suggested that if TMDs are not working they should be abolished.

Another told insuranceNEWS.com.au that consumers are baffled.

“They couldn’t understand the product disclosure statement. They can’t now understand the Target Market Determination statement. They don’t even read it, they don’t even look at it.

“Wait until you get your home renewal, open it up and see if you have any idea what you’re being told. It’s so confusing.”

CBN MD Richard Crawford told insuranceNEWS.com.au that it’s “early days” for TMDs and the benefits may yet become apparent.

“The fact that the industry hasn’t taken a uniform approach to monitoring and reporting TMD application adds to the complexity of implementation at a broker level,” he said.

“It makes the general insurance product more complicated to buy, not less and needs to be explained to the customer.

“Ultimately, where the broker and underwriter have done their job properly, they should be a  redundant failsafe.”

However, consumer groups have argued that brokers are not correctly interpreting the purpose of TMDs.

“Brokers need to understand that consumers are not meant to read and understand them,” Senior Policy and Advocacy Officer at Financial Rights Legal Centre Drew MacRae said.

“ASIC has made this clear to us 100 times and I am sure that they have said the same to industry. This is a regulatory tool – not a disclosure tool. It is a conceptual shift that may take some getting used to but if implemented appropriately will lead to better outcomes for consumers.

“This is a reform aimed at shifting the onus away from solely being on consumers – who have, to date, been unrealistically assumed to have read and understood long, complicated disclosure documents – on to financial firms to development safe, fit-for-purpose products and services suitable for different identifiable cohorts of consumers.”

Principal at McCabes law firm Mathew Kaley says that insurers are required by the legislation to publish TMDs.

“However, the purpose is not to assist customers with their consideration of the insurers’ products,” he said.

“It is to ‘mitigate evidential difficulties with substantiating non-compliance’ with the Design and Distribution Obligation requirements.

“As ASIC states, the TMD is not a ‘customer-facing disclosure document’. It is the issuer’s description of the customers that come within the target market for the particular product and a record of matters relevant to the product’s distribution and review.”

But Mr Kaley does see potential for consumer confusion where TMDs sit alongside PDSs.

And he says that brokers face particular challenges.

“If a broker places retail cover for its client, based on personal advice given, the broker is excluded from most of the DDO obligations,” he said.

“However, where brokers distribute retail products under binder for an insurer, or otherwise without providing personal advice, they do not have the benefit of that exemption.

“Brokers have had to work with insurers, as the product issuers, to comply with DDO in those situations.

“That has given rise to some practical challenges, for instance where several insurers are underwriting a retail product based on the broker’s policy wording.

“In that case, there could naturally be tension between the broker’s need for a single target market and set of distribution conditions for its product, and the insurer’s responsibility for the TMD concerned.”

The Insurance Council of Australia (ICA) agrees that TMDs are not designed to be an extra burden on consumers.

“While TMDs are available to customers, the goal of DDO is to put the onus on insurers to make sure financial products are designed for and distributed to the right people,” a spokeswoman said.

However, ICA has called for a post-implementation review of all royal commission reforms.