Understanding the Design and Distribution Obligations
AFA News 4 November 2021. The Design and Distribution Obligations commenced on 5 October 2021, however, with so much reform happening at the one time, this major reform received less attention in the financial advice sector and has generated quite a lot of concern and confusion. Obligations apply at both the product issuer and the distributor levels and financial advisers are captured in the regime as distributors.
Target Market Determinations and Reporting
Product issuers are generally required to prepare a Target Market Determination (TMD) for each product, which sets out which clients are suitable, what the triggers are for reviewing the TMD, and the reporting requirements that apply to distributors. Some TMDs also include guidance on the meaning of a significant dealing. Advisers are expected to take these TMDs into account when providing advice, however, due to other obligations, such as the Best Interests Duty, they are not required to ensure that all clients comply with the TMD. Advisers can recommend a product to a client who does not fit within the TMD; however, this is unlikely to be a common occurrence.
Regular reporting to product issuers, as defined within the TMDs, is required by advice licensees, particularly with respect to any complaint about the products. For some product issuers, this reporting is quarterly, whereas for others it might be every six months. It is important to note that this is complaints about the products, rather than the advice, so complaints about poor investment performance or significant life insurance premium increases would be classified as product complaints. Originally there was a requirement for distributors to provide nil reports (when there was nothing to report). Fortunately, in September the Government stepped in to remove the need to do nil reports, which would have been a huge bureaucratic nightmare, particularly for smaller licensees with broad APLs.
There has been some confusion about the application of TMDs to investment options, and whether for example, a small investment in a higher risk product by a more conservative investor is likely to be classified as outside the TMD. We understand that this needs to be assessed at the portfolio level and not the individual investment option level. Thus, a small allocation to a high growth product within a broader portfolio that aligns to the client’s risk profile, would generally not be outside the TMD (unless another aspect of the product is unsuitable for the client).
Significant dealings have also been a point of confusion, with a lack of clarity about what is a significant dealing and why some product issuers have required reporting of all transactions that are outside the TMD (typically through the application form). It is important to note that significant dealings are only where the client is outside the TMD and there is a risk of material detriment to the client. Many product issuers set out criteria for defining significant dealings in product TMDs, however in practice significant dealings are not expected to be common. We are working with the FSC and expect that further guidance will be provided in the short term.
More Information on DDO
We encourage members to ask questions about the DDO requirements, and whatever confusion they are experiencing with meeting these obligations. Please forward any questions to firstname.lastname@example.org
For more information on DDO for advice licensees and financial advisers please refer to the ASIC FAQ in Information Sheet 264.
Issued 04.11.2021. AFA Policy & Education Update