Design and Distribution Obligations

  • OIG
  • News
  • No Comments

Design and Distribution Obligations

What is it?

From 5 October 2021, issuers and distributors of financial products must comply with the design and distribution obligations in Pt 7.8A of the Corporations Act 2001 (Corporations Act) (D&D Obligations). Any financial product that requires a PDS is included in the range of financial products the D&D Obligations apply to. The D&D Obligations are therefore relevant to OIG’s registered schemes that will be offering units under a PDS on or after 5 October 2021. D&D Obligations are not relevant to wholesale schemes.

What will OIG be doing?

OIG will be enhancing its policies and procedures that relate to the on-boarding of registered schemes. This may require changes to its Investment Management Agreements with managers of registered schemes. OIG will develop a template target market distribution statement to be completed in collaboration with the manager.

What OIG expects its managers to do?

OIG expects managers to work collaboratively with it to populate the template target market distribution statement and where relevant to provide OIG with copies of the manager’s documented product governance procedures demonstrating the manager will have in place systems and processes to regulate distribution.

Managers responsible for distribution will likely have obligations under the Act and should seek legal advice now as to how you will comply with those obligations.

Summary

In December 2020, ASIC released its final regulatory guidance on product design and distribution obligations, RG 274. The final regulatory guide was quite different from the consultation draft previously circulated and we are aware that some advisers consider the regulatory guide imposes obligations beyond those imposed under the Corporations Act. For managers who had started developing policies and procedures based on the consultation draft of the product design and distribution obligations regulatory guide, they may need to start again. OIG intends to follow the guidance set out in the final form of RG 274.

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 the design and distribution of products supporting ASIC’s view that disclosure alone is not enough to protect consumers. In particular:

  • issuers must design financial products that are likely to be consistent with the likely objectives, financial situation and needs of the consumers for whom they are intended;
  • issuers and distributors must take ‘reasonable steps’ that are reasonably likely to result in financial products reaching consumers in the target market defined by the issuer; and
  • issuers must monitor consumer outcomes and review products to ensure that consumers are receiving products that are likely to be consistent with their likely objectives, financial situation and needs.

The design and distribution obligations require issuers and distributors to develop and maintain effective product governance arrangements across the life cycle of financial products. ASIC considers this will result in improved outcomes for consumers of these products.

The design and distribution obligations will require the OIG Responsible Entity for your Fund and any person who distributes¹ the financial product to determine the needs of investors, design products that are suitable for those investors and distribute the financial product only to those investors.

Obligations for OIG’s REsObligations for Managers and others who are distributors
Implement and maintain robust and effective product governance arrangements to ensure compliance with design and distribution obligations.
Prepare a target market determination for financial products. The determination must be documented and meet content requirements as set out in the Corporations Act 2001 (Cth) (Corporations Act).Must not engage in retail product distribution unless the distributor knows or reasonably believes that a target market determination has been made by the issuer.
Make the target market determination publicly available.Take reasonable steps that will, or are reasonably likely to, result in a distribution being consistent with the most recent target market determination.
Take reasonable steps that will, or are reasonably likely to, result in a distribution being consistent with the product’s target market determination.Notify the product issuer of any significant dealing in a product that is not consistent with the target market determination.
Review the target market determination within 10 business days if the issuer knows or ought reasonably to know that the determination is no longer appropriate.Keep records of the number of complaints received about a product and information specified by the issuer in the target market determination.
Notify ASIC of any significant dealing in a product that is not consistent with the target market determination.
Keep records of all decisions made in relation to its target market determinations and reviews, and any distribution activities engaged in by the issuer.

These obligations support ASIC’s product intervention powers which commenced in April 2019. ASIC has stated that it may also take enforcement action and will use its product intervention power where satisfied that the product has resulted, will result or is likely to result in significant consumer detriment.

 


¹Distribution means “retail product distribution conduct” in relation to a consumer comprising dealing in the financial product, giving or providing a PDS in relation to offering a financial product and providing financial product advice.