Design and Distribution (“DDO”) Regime

The Design and Distribution Obligation (“DDO”) Regime came into effect on 5 October 2021.

 

Who does the Regime Apply to?

The DDO apply to a range of financial products under the Corporations Act 2001 (“Corporations Act”), ASIC Act 2001(“ASIC Act”) and National Consumer Credit Protection Act 2009 (“NCCP Act”).

Products for which a Product Disclosure Statement (“PDS”) must be prepared under Part 7.9 of the Corporations Act

• OTC derivatives
• Certain foreign exchange contracts
• Interests in a managed investment scheme
• Non-cash payment facilities
• General insurance
• Life insurance
• Interests in a superannuation fund

Note: generally, the requirement to provide a PDS relates only to products which are issued to retail clients, however if you are unsure whether this applies to you, we suggest contacting your lawyer.

Securities for which a disclosure document must be prepared under Part 6D.2 of the Corporations Act

• Partly-paid ordinary shares;
• Debentures or notes;
• Preference shares, convertible notes or other hybrid securities

Financial products under Division 2 of Part 2 of the ASIC Act

• Credit contracts
• Consumer leases
• Products regulated under the NCCP Act, including:
– credit cards;
– home loans;
– funeral expenses.

Credit facilities under the ASIC Act

• Short-term credit exempt from the NCCP Act

There are some product exemptions, including:

  • MySuper products;
  • margin lending facilities;
  • fully paid ordinary shares in a company, including foreign companies; and
  • securities issued under an employee share scheme.

There are also exemptions for certain conduct.

 

What are the Obligations?

Product Governance Arrangements

Issuers and distributors need to implement and maintain robust product governance arrangements. These arrangements need to consider each stage of product design and development – including design, distribution, monitoring and review. ASIC expects that product governance arrangements will be client-centric and include appropriate steps to ensure.

  • representatives are trained in their understanding of the product governance arrangements and how this applies to the products developed and/or distributed by the licensee;
  • compliance with the product governance arrangements and appropriate reporting lines where the arrangements have been breached.

 

Target Market Determination (TMD)

Issuers must develop a TMD for each of their financial products and make it publicly available prior to distributing their products. TMDs must:

  • describe the class of retail clients that form the target market;
  • specify any restrictions on distribution;
  • specify events or circumstances that may reasonably suggest a TMD is no longer appropriate;
  • specify reasonable review periods;
  • specify when a distributor should provide information about the number of complaints about each product;
  • specify the type of information the issuer needs to identify promptly, whether a review trigger or another event has occurred, which would reasonably suggest that the TMD is no longer appropriate.

 

Reasonable Steps

Issuers and distributors have the obligation to take reasonable steps that will or are reasonably likely to, result in the distribution of the financial products being consistent with the TMD.

 

Record Keeping

Issuers are required to keep specific records about the TMD it prepares, and distributors are required to keep records of distribution information as specified in the TMD.

 

Significant Dealings

Issuers are required to notify ASIC of significant dealings in relation to the TMD within 10 business days of becoming aware of the dealing. RG274 prescribes certain information which must be included in the notification to ASIC. Distributors have an obligation to notify issuers regarding significant dealings in order to facilitate the issuer’s notification to ASIC.

 

Compliance Action Items

Issuers:

  • Identify all retail products offered or proposed to be offered
  • Identify your distributors and consider your distribution agreements and amend as required
  • Ensure product governance arrangements are implemented and updated as required
  • Develop a TMD for any new products
  • Review and update existing TMDs as per the triggers included in the TMD
  • Ensure you have compliance procedures in place to meet the reasonable steps obligation
  • Ensure your record keeping procedures, including any IT arrangements, are up to date or amended as required
  • Ensure your beach reporting arrangements are up to date in light of the obligation to report significant dealings

 

Distributors:

  • Ensure product governance arrangements are implemented and updated as required
  • Review the TMDs for products that you distribute and ensure appropriate procedures are in place to distribute the product in accordance with the TMD
  • Ensure you have compliance procedures in place to meet the reasonable steps obligation
  • Ensure your record keeping procedures, including any IT arrangements, are up to date or amended as required

 

How can Sophie Grace Assist?

We have templates which you can use as a starting point for implementing the DDO regime within your business. There are a number of options available according to your business type – if you are unsure which is relevant for you, please do not hesitate to call, email or chat with us.

 

Background to the DDO Regime

The origins of the design and distribution obligations are well-articulated in ASIC’s Regulatory Guide 274.  Similar provisions have been implemented in other major jurisdictions around the world such as the United Kingdom (by the Financial Conduct Authority) and Europe (by the European Securities and Markets Authority)

In Australia, the Financial System Inquiry’s (FSI) recommendation for the introduction of the design and distribution obligations in 2014 was based on its view of the limitations of a framework for consumer protection in financial services that relies heavily on disclosure, financial advice and financial literacy.

In particular, the FSI concluded that ‘disclosure can be ineffective for a number of reasons’ and that ‘disclosure alone is unlikely to correct the effect of broader market structures and conflicts that drive product development or distribution practices’ that result in poor consumer outcomes.

The FSI concluded that poor design and distribution practices played a significant role in contributing to consumer detriment. It is in this context that the FSI recommended the introduction of the design and distribution obligations as a supply-side intervention that places additional responsibility for consumer outcomes on issuers and distributors.

The design and distribution obligations are intended to help consumers obtain appropriate financial products by requiring issuers and distributors to have a consumer-centric approach to designing and distributing products.

The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019 received Royal Assent on 5 April 2019 which amended the Corporations Act, the NCCP Act, and the ASIC Act.

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