The design and distribution obligations (DDO)
may have been deferred for six months, but they’re not going
away.
Product issuers and distributors still need to prepare for the
commencement of this regime – now set for 5 October 2021.
So what do you need to do to prepare? This will depend on
whether you’re a product issuer or a distributor, or whether
you’re responsible for both of these functions.
The DDO regime
The DDO regime introduces a new approach to regulation, by
moving away from relying on disclosure as the main form of consumer
protection and introducing new measures to ensure that products are
designed and distributed with consumers in mind. As ASIC states in
Consultation Paper 325:
The regime seeks to rebalance – between consumers and
industry – the onus for effecting good consumer outcomes, and
avoiding poor ones, in the provision of financial
products.
The DDO regime generally applies in relation to financial
products issued to retail clients that require a disclosure
document (PDS or prospectus) and also products that are not
regulated under Parts 6D.2 or 7.9 of the Corporations Act
2001, but that are ‘financial products’ under the
ASIC Act (including credit contracts and consumer leases).
The regulations also extend the DDO to apply to IDPSs.
Certain products are excluded though, including fully paid
ordinary shares, MySuper products, margin lending facilities and
securities issued under an employee share scheme.
What do product issuers need to do?
When it comes to launching a new product, hopefully every
product provider aims for their offering to comply with the
existing regulatory framework. Apart from meeting this existing
pre-requisite (which is more prescriptive for some financial
products than others), the new DDO regime now brings into focus,
the likely objectives, financial situation and needs of retail
clients.
ASIC expects in relation to the DDO, that product issuers will
maintain product governance frameworks, to provide for effective
product governance across the lifecycle of financial products.
Amongst the new requirements, issuers and distributors will need
to take reasonable steps that will, or are reasonably likely to,
result in distribution of the financial product being consistent
with the product issuer’s corresponding target market
determination.
Target market determinations
Under the DDOs, product issuers will be required to make an
“appropriate’ target market determination (TMD) for each
of their financial products, before such products are distributed.
The requirement applies to the issuer’s new products and also
its existing products, where those products continue to be offered
after the commencement of the DDO.
What are the TMD content requirements?
The TMD must:
- Describe the class of retail clients that comprises the target
market; - Specify any conditions or restrictions on retail product
distribution conduct; - Specify events and circumstances that may reasonably suggest
that the TMD is no longer appropriate (review triggers); - Specify the maximum period of time from the start of the TMD to
when the first review must be completed; - Specify the maximum period of time from the start of the period
after the first TMD is completed, to the completion of the second
review; - Specify the reporting period for reporting information about
complaints; - Specify the type of information the issuer needs to identify
promptly, whether a review trigger or another event has occurred,
which would reasonably suggest that the TMD is no longer
appropriate and specify who must report the information to the
issuer and in what time frame.
Review of the TMD
The TMD will also include review triggers, such as those
circumstances or events that would reasonably suggest the TMD may
no longer be appropriate. Importantly, they are a prompt to stop
distributing the product until the TMD is reviewed.
Distributors
Under the DDO, distributors have their own obligations. ASIC
expects that distributors will maintain product governance
frameworks, for the purpose of ensuring that the distributor
complies with its design and distribution obligations.
Distributors must take reasonable steps that will, or are
reasonably likely to, result in distribution that is consistent
with the TMD for the financial product (the reasonable steps
obligation). In many cases, the distributor should be able to
obtain enough information about the consumer through the
application process, to determine whether the consumer is in the
target market.
In some cases though, the distributor will need to take the step
of asking the consumer certain questions. However, distributors
should not in these cases, give consumers the impression that the
distributor has considered their personal circumstances.
It is worth noting that the law does contain an exclusion,
whereby asking a person for information solely to determine whether
they are in the target market for a financial product and informing
the person of the result of that determination, does not in itself
constitute personal advice.1
How does the DDO regime interact with an advisor’s
obligations in relation to the provision of personal financial
product advice?
As you will be aware, financial advisers who provide personal
advice are already under an obligation to take into account the
consumer’s personal circumstances and provide advice that is
appropriate.
When providing personal advice to a client in relation to the
relevant financial product and implementing that advice, advisers
will not be taken to have failed to take reasonable steps that
will, or are reasonably likely to, result in distribution of a
financial product being consistent with the TMD2.
Having said that, ASIC does believe that financial advisers
should consider the TMD for a financial product where they provide
personal advice and in meeting their best interests duty.
DDO and responsible lending obligations
As the DDO regime applies to credit products, ASIC considers
that issuers and distributors may benefit from developing
compliance practices that are complimentary to both the DDO and
responsible lending regimes. ASIC’s current view is that the
reasonable steps required by DDO do not require further steps to be
taken by a distributor when assessing (for responsible lending
purposes), the consumer’s ability to comply with their
financial obligations under the relevant contract.
However, this is not in itself an exclusion from DDO and issuers
and distributors will need to give careful consideration to how
they will meet the new requirements. Additionally, in the case of
mortgage brokers, they will also need to separately comply with the
new mortgage broker best interests duties (now deferred until 1
January 2021).
When Product Issuers are also distributors
Where product issuers deal directly with consumers, they too are
considered to be distributors under the DDO regime. Distributors
must take steps that will, or are reasonably likely to, result in
its retail product distribution conduct being consistent with the
target market determination.
Many issuers, such as responsible entities, superannuation
trustees and IDPS operators already monitor and impose their own
terms and conditions on licensees and authorised representatives
who distribute their products. Apart from considering how DDO will
affect those arrangements, those providers will also need to
consider their own obligations as distributors, where they also
deal directly with retail clients. These matters can become more
complex where those product issuers appoint promoters to assist in
the distribution of those products.
Statutory reporting – significant dealings that are not
consistent with the TMD
The DDO will also have a statutory reporting component, where
“significant dealings’ in the product have taken place,
which are not consistent with the TMD. Product issuers will need to
notify ASIC of such dealings, as soon as practicable and in any
case within 10 business days3.
Distributors will instead need to inform the person who made the
TMD (the product issuer) as soon as practicable and in any case
within 10 business days of becoming aware of such significant
dealings in the product4.
So what do you need to do now?
The introduction of the DDOs and the requirement for issuers and
distributors to maintain robust product governance frameworks will
go some way towards addressing the serious compliance issues
identified by the Financial System Inquiry and the Royal Commission
into Misconduct in the Banking, Superannuation and Financial
Services Industry.
As you work through the DDOs and set up your product governance
frameworks, don’t lose sight of the fact that it is about
improving consumer outcomes. The DDOs increase responsibility for
product issuers and distributors, in relation to any poor consumer
outcomes resulting from their products and products they
distribute.
We are developing DDO templates for our HN Hub subscribers who also have access to
around 250 other policies, procedures and ongoing training
tools.
Footnotes
1
Section 766B(3A) of the Corporations Act 2001.
2 Section 994E(3) of the Corporations Act
2001 and the definition of “excluded conduct” in
s994A(1).
3 Section 994G of the Corporations Act
2001.
4 Section 994F(6) of the Corporations Act
2001.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
