AFA News 9 September 2021. We have been talking for some time about the wave of reforms that are due to commence in October. This includes the new breach reporting regime, mandatory reference checking, the APRA IDII Intervention phase two, the new Internal Dispute Resolution regime and the Design and Distribution Obligations.
The Design and Distribution Obligations (DDO) regime has been on the way for a long time. It was first proposed in the Financial System Inquiry final report in 2014. It reflects similar practices overseas.
The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019 was passed in April 2019. The law provided for a two-year transition period, however in response to COVID 19, last year ASIC provided a six-month extension until 5 October 2021.
The DDO obligations apply to both product issuers and distributors. Financial advisers are classified as distributors in the DDO regime, however, are subject to special classification.
The DDO regime is based around product issuers and distributors having increased responsibility to ensure that products are directed at the right consumers and that products are designed with the target market in mind. This is seemingly to address issues in the past with poorly designed products and products being sold to the wrong consumers.
Product issuers have the following obligations:
- To prepare Target Market Determinations (TMD). TMDs define which clients may be suitable for the product. The things that are considered are matters such as investment risk, investment options range, age suitability etc.
- To regularly review their target market determinations to make sure they remain appropriate.
- Specify reporting obligations for distributors.
- Notify ASIC of significant dealings that are not consistent with the TMD.
- Taking reasonable steps to ensure that the product is distributed in accordance with the TMD.
The DDO obligations will apply to almost all products. It is important to note that TMDs are not required for MySuper products, and with Superannuation, one TMD can be prepared for the product, inclusive of superannuation and insurance, whereas with Wrap or IDPS products, a TMD will need to be prepared for each investment option. There are some notable other exemptions, including margin lending and ordinary shares, other than Listed Investment Companies.
The FSC has produced templates for TMDs for a range of different products.
Some product issuers have started to release their TMDs in the lead up to 5 October 2021. Please have a look at the TMDs provided by Colonial First State and Challenger. You should expect to hear from all product issuers by 5 October 2021.
Distributors have the following obligations:
- Take reasonable steps to ensure that products are distributed to clients consistent with the TMD. There is an exemption for financial advisers.
- Notify product issuers of significant dealings that are not consistent with the TMD (within 10 business days).
- Providing regular reporting to product providers, including complaints and other information that applies to that product as specified in the TMD. This can and will differ across products.
- Maintain records of all reports for seven years.
There is an exemption for financial advisers from the requirement to ensure that the client’s circumstances are consistent with the TMD. This is due to the best interest duty obligations that apply in the provision of personal advice. The complication is that the product issuer needs to know that it is a case of personal advice, as this exemption does not apply in the case of general advice or execution only services provided by a financial adviser. So, product providers are going to seek confirmation from advisers that it is a personal advice case. This might be through the application form, or some other means. ASIC also expects that financial advisers would take the TMD into account when providing advice.
Reporting requirements may differ from product to product and will be defined by the product issuers and set out in the TMDs. Reporting is going to be the big issue, particularly for small licensees and this will be compounded for those licensees with a broad APL. The FSC are proposing quarterly reporting in their templates, and it is important to note that nil reports will be required. There will inevitably be a large number of nil reports. Automation and efficiency will be important.
The obligation to report significant dealings, that is inconsistent with the TMD, applies to financial advisers, however ‘significant’ is not defined. The TMDs are expected to provide further guidance.
We are very concerned about the complexity of this new regime and the significant additional administrative work that will be required. The lack of consistency and certainty will make the initial phase very challenging. We welcome the recent ASIC statement about a facilitative approach being taken to compliance with all these new reforms, provided reasonable efforts are being made.
For any questions on DDO, please email firstname.lastname@example.org.
Issued 09.09.2021. AFA Policy & Education Update