On Friday 8 May 2020 ASIC announced that it will defer enforcing design and distribution obligations (DDO) for six months until 5 October 2021 (these obligations were originally to commence on 5 April 2021)
Recently, Australia joined the European Union, UK, Asia and Canada in tightening oversight of product creation and selling practices in financial services, including credit.
International regulators sought to address concerns that financial services organisations were not managing risks around their sales practices appropriately. That is, customers were not being treated fairly, often left victims of mis-selling and breaches of other conduct obligations.
In April 2019 Australia passed legislation to enshrine in law customer-centric product design, distribution and marketing to retail clients. ASIC was also granted unprecedented powers to intervene in these processes, including stop orders. Collectively these are known as design and distribution obligations (DDO) and product intervention powers (PIP).
So, what does this mean exactly?
What are the design and distribution obligations?
Design and Distribution Obligations are new obligations requiring issuers and distributors of financial products to:
- Determine the target and non-target markets for their products based on consumers likely needs and objectives;
- Ensure they advertise and promote those products only to this target market; and
- Ensure that application processes will vet non-target consumers from being able to acquire products that are unlikely to meet their needs and objectives.
If your organisation gets its head around only one thing, make it the target market determination (TMD). This is the requirement on the part of product issuers to determine, and publicly disclose, who the target and non-target markets are for their products based on consumers’ likely needs and objectives.
What might that mean for your organisation?
For many uncontroversial, straightforward financial products and services, changes will be confined to minor changes to processes, documentation and compliance requirements.
In the short term, current documents need to be retrofitted for everything from terms and conditions for basic deposit products to Product Disclosure Statements (PDS) for more complex, structured products.
Longer term, sound practice will entail TMDs being reviewed each time a significant review of a PDS or other disclosure document is undertaken. Complaints handling programs will need to incorporate matters relating to setting and implementation of TMDs.
On the whole, whether your organisation is a product issuer or a distributor, it will need to re-examine its procedures.
What product areas are most impacted?
New provisions will be especially challenging for sectors that ASIC has already identified as issuers and distributors of "low value products". These include high cost credit products, retail OTC derivatives, direct life insurance, and add-on insurance.
The changes will be felt most significantly where products are:
- subject to product selection bias. These include products that pay distributors generous commissions or incentivise bundling with related products or services.
- generating mostly unfavourable consumer outcomes. These include investments that accrue zero or negative returns or put investors' initial capital at risk. Insurance products with a low percentage of successful claims are another example.
As well as being able to issue stop orders, ASIC will consider non-compliance with some obligations as an offence and/or attracting civil penalties.
“Design and distribution obligations look set to be among the most consequential tools regulators globally, including ASIC, have in response to concerns about the creation of harmful products and services and how they are then sold,” says Financial Education Professionals Manager of Industry Capability, Belinda Brown.
Remember, both issuers and distributors of financial products are affected and ASIC can and will intervene if businesses do not comply.
It is likely that some issuers will need to adopt a more principles-based, hands-on approach to product development and distribution than they may have previously. They will no longer be able to rely on carefully drafted marketing and advertising to overcome flawed product design and poorly conceived pricing and distribution.
It is now more important than ever for your organisation to stay informed about product governance obligations and identify, in advance, operational changes that may be required.
If you’re interested in reading up on the nitty gritty, head to the legislation, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Cth), or the related ASIC media release and podcast.
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