Australia: ASIC Regulatory Guide 274: ASIC finalises its views on design and distribution obligations (DDO) of financial products

On Friday 11 December 2020, ASIC released its finalised regulatory guidance in Regulatory Guide 274 Product design and distribution obligations (RG 274) for issuers and distributors of financial products that must comply with the design and distribution obligations (DDO) in Pt 7.8A of the Corporations Act 2001 (Cth) (Corporations Act). The changes to the DDO will significantly alter the way financial products are formed, marketed and promoted, with commencement of the new laws scheduled from 5 October 2021.¹

The Treasury Laws Amendment (Design and Distribution Obligations and Product intervention Powers) Act 2019 (Cth) introduced the DDO to Chapter 7 of the Corporations Act, following the release of a draft version of RG 274 in December 2019 to allow for extensive industry consultation. The final RG 274 provides a detailed and comprehensive summary of ASIC's expectations placed on issuers and distributors of financial products under the new regime.

This article provides a summary of the coverage of the DDO and some of the key documents and procedures issuers and distributors of financial products must comply with.

Key features of the Design and Distribution Obligations

Purpose of the regime

At the heart of the DDO is an intention by the regulator to help consumers obtain appropriate financial products by requiring issuers and distributors to have a consumer-centric approach to their design and distribution

The obligations require issuers and distributors to develop and maintain effective product governance arrangements across the life cycle of financial products to ensure that consumers are receiving products that are consistent with their likely objectives, financial situations and needs.

Financial products

As a threshold point, the DDO apply to certain financial products.²

Broadly, the financial products covered by the DDO include:

1. Products and securities requiring a Product Disclosure Statement (PDS) under Pt 7.9 of the Corporations Act (e.g. interests in managed investment schemes, general insurance and interests in superannuation funds).
2. Securities for which disclosure documents must be prepared under Pt 6D.2 of the Corporations Act (e.g. hybrid securities), except for ordinary shares.
3. Products that are not regulated under Pts 6D.2 or 7.9 of the Corporations Act, but are within the scope of the Australian Securities and Investments Commission Act 2001 (ASIC Act) (e.g. credit contracts and short-term credit facilities).
4. Other products prescribed by the Corporations Regulations 2001 (Cth) (Regulations) as requiring a 'target market determination' (TMD). ³

Products that are excluded from the DDO include MySuper products, margin lending facilities, fully paid ordinary shares (generally), securities issued under an employee share scheme and certain products specified by the Regulations. 4

Importantly, the obligations apply for products launched after the commencement of the regime and products that continue to be issued to consumers.

'Issuers' and 'distributors' and meaning of 'distribution'

The DDO will apply to 'issuers' and 'distributors' of financial products that are available for acquisition by issue or regulated sale in Australia.

Issuers (generally) include persons who: ⁵

• issue a financial product; and
• must prepare a disclosure document under the Corporations Act.

Distributors (generally) include regulated persons, such as: ⁶

• Australian financial services licensees;
• authorised representatives;
• credit licensees; and
• credit representatives.

For the purposes of the DDO, a distribution covered by the regime includes 'retail product distribution conduct', meaning: ⁷

• 'dealing' in a financial product;
• giving a PDS in relation to offering a financial product;
• providing a PDS; and
• providing financial product advice.

The provision of personal financial product advice is 'excluded conduct' and not covered by the DDO.

Key obligations for issuers and distributors

Key obligations at a glance

Broadly, the DDO require 'issuers' of financial products to develop a TMD document before engaging in 'retail product distribution conduct' that: ⁸

1. Identifies a 'target market'. The TMD must identify the 'key attributes' of the product and determine whether the key attributes are consistent with the likely objectives, financial situations and needs of the target market. A product cannot be offered without an appropriate target market.
2. Specifies 'distribution conditions'. The issuer must ensure that the distribution of the financial product is directed towards consumers who are likely to acquire the product.
3. Plans monitoring and review. An issuer must continually review the product and the target distribution and set out circumstances in which a review will be required. Further, the issuer must consider whether changes are required to the way the product is sold, or to whom it is being sold.

Both issuers and distributors must take reasonable steps that will, or are reasonably likely to, result in distribution being consistent with the TMD.

Both issuers and distributors also need to consider their distribution methods and factors that could affect whether consumers receive a financial product that is consistent with their likely objectives, financial situations and needs.

Product governance arrangements

Issuers and distributors must implement and maintain robust and effective 'product governance arrangements' to ensure that they comply with the DDO.

Essentially, the product governance arrangements must stipulate controls in place to ensure the DDO are complied with at the product design, product distribution and monitoring and review stages of developing and distributing a financial product. The focus of the arrangements should be on ensuring that consumers receive financial products consistent with likely objectives, financial situations and needs.

Importantly, effective product governance arrangements require issuers and distributors to:

1. Document the arrangements. The arrangements should include details of who is responsible, the timeframes involved, and associated record keeping and reporting.
2. Implement, monitor and report on the arrangements. Staff at all levels, including senior management, should understand these arrangements and be committed to the success of the arrangements.
3. Review the arrangements. Issuers and distributors must review the product governance arrangements and identify changes in their business that may impact the effectiveness of the arrangements.

Connected with the product governance arrangements is an expectation that issuers will put in place controls to ensure that meaningful review of the TMD takes place. The possible outcomes of a review of the TMD include:

• no change to the way the product is distributed;
• changing the product design, target market or distribution; or
• ceasing to distribute the product.

Next steps

The design and distribution obligations under Pt 7.8 of the Corporations Act are set to commence from 5 October 2021. The DDO will bring industry wide changes to the way financial products are formed, promoted and marketed. It is therefore imperative that financial product issuers and distributors captured by the DDO regime begin preparing themselves for its commencement.

Importantly, issuers and distributors should commence preparing documentation required by the regime, including TMDs and product governance arrangements. Adequate documentation will allow the issuers and distributors to satisfy ASIC that they can comply with the key obligations of the regime.

Our financial services team can assist businesses preparing and implementing documentation required by the DDO regime. Please contact us if you'd like to discuss any aspects of these reforms.

Footnotes

¹See ASIC Corporations (Deferral of Design and Distribution Obligations) Instrument 2020/486.
² Sections 994AA and 994B(1) of the Corporations Act 2001 (Cth).
³ Examples includes depository products in simple corporate bonds, debentures, basic deposit products, IDPSs, ETPs and certain custodial arrangements. See regs 7.8A.05 – 7.8A.10 of the Regulations.
⁴ Section 994B(3) of the Corporations Act.
⁵ Section 994B(1)(a) of the Corporations Act. The meaning is extended by Regulations reg 7.8A.05 – 7.8A.07.
⁶ Section 994A(1) of the Corporations Act. The meaning is extended by Regulations reg 7.8A.02.
⁷ Section 994A(1) of the Corporations Act.
⁸ See Corporations Act s 994B.

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.

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