ASIC has recently announced it will defer the commencement date of the Design and Distribution Obligations (“DDO”) by six months until 5 October 2021. We recommend taking advantage of the additional time to begin preparing your business in order to comply with the new obligations. The first half of the amendments, being the Product Intervention Powers, have already commenced (see our blog article).
What do ASIC’s Design and Distribution Obligations mean for the Financial Services and Credit Industries?
The DDO regime will apply to all financial products as defined by the Corporations Act and the ASIC Act, which includes securities, insurance products, derivatives, superannuation and credit products as defined by the NCCP Act.
The DDO aims to bring accountability to issuers and distributers to design, market and distribute financial and credit products that meet consumer needs. Entities will be required to identify in advance the consumers for whom their products are appropriate, and direct distribution to that target market.
The new regime is welcomed by ASIC as providing a comprehensive framework of protection for most consumer financial products.
The new obligations require product issuers to make a target market determination for financial products and ensure that the determination remains appropriate. The information needs to be made publically available. Issuers must notify ASIC of any significant dealing in a product that is not consistent with the target market determination. The determination must be reviewed to ensure it remains appropriate.
A target market determination describes a class of persons who comprise the target market and sets out any conditions or restrictions in relation to that target. The target market determination is considered appropriate if the product would generally meet the likely objectives, financial situations, and needs of the persons in the target market.
Product distributors must take reasonable steps to ensure that retail product distribution is consistent with the target market determinations. They must not engage in ‘retail product distribution conduct’ in relation to a product if a target market determination has not been made, or if it is no longer appropriate. They must collect information related to the distribution of a product and notify the product issuer of any significant dealings in the product that are not consistent with the target market determination.
Failure to comply with the regime may result in civil liability as well as criminal penalties. There will be a private cause of action where an entity fails to make a target market determination under the regime. A person who suffers loss or damage as a result can recover their loss through civil action.
The court can also, on application from ASIC, make orders to benefit non-party consumers who have suffered loss or damage because of a contravention of the regime, including declaring a contract to be void. In addition, ASIC can utilise its powers to issue a stop order on the product where ASIC determines there is risk of causing significant detriment to customers.
Contraventions include the following:
- failure to make and make available target market determinations for financial products;
- failure to review target market determinations;
- engaging in retail product distribution conduct where no target market determination has been made or reviewed;
- failure to inform regulated persons of obligations not to engage in retail product distribution conduct in relation to financial products before review of target market determinations;
- failure to keep records;
- failure to report complaints and other information;
- failure to comply with requirements of regulations;
- failure to notify ASIC of a significant dealing that does not comply with a target market determination;
- failure to provide information to ASIC on request; and
- failure to comply with stop order obligations.
Keep in mind
Product issuers will need to review their policies and procedures in relation to the design, distribution and review of products. Approval processes may need amending or updating. Product offerings may need to be reviewed to ensure complex products are offered to retail clients appropriately.
Issuers and Distributers will need to assess their training, monitoring and operational controls to comply with the new obligations.
Product issuers will need to balance determining their target markets, without being potentially seen to provide personal financial advice to clients where not authorised to do so. Section 766B(3A) Corporations Act 2001 provides that “asking for information solely to determine whether a person is in a target market will not of itself constitute personal advice”.
TheTreasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019 received Royal Assent on 5 April 2019 which amended the Corporations Act 2001 (Corporations Act) and the National Consumer Credit Protection Act 2009 (NCCP Act), and the Australian Securities and Investments Commission Act 2001 (ASIC Act).
In December 2019, the Government passed regulations to support the new DDO regime. The purpose of the regulations is to enhance the DDO regime by altering the products and entities that are subject to the DDO regime, by:
- extending the DDO to additional persons;
- extending the DDO to additional products; and
- excluding certain products from the DDO.
- 19-079MR ASIC Welcomes Approval of New Laws to Protect Financial Service Consumers
- Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019
- Corporations Amendment (Design and Distribution Obligations) Regulations 2019
- 20-109MR ASIC defers commencement of mortgage broker reforms and design and distribution obligations
Should you have any questions about how the Design and Distribution Obligations could affect your business, please contact us.