In April this year, ASIC was granted wide-reaching product intervention powers under the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Cth) (the Act).1 In a further push to align financial products with consumers’ needs, the Act also introduced a new set of design and distribution obligations (DDOs), which all issuers and distributors of financial products to retail customers must comply with from April 2021.
The DDOs require a consumer-oriented approach to the design, marketing and distribution of financial products. The DDOs impose positive obligations on issuers and distributors to ensure that financial products are targeted and sold to the appropriate class of consumers.
The DDOs are an attempt to mitigate the harm to consumers caused by financial investment failures.2 Relying solely on disclosure to consumers to avert such failures has proven ineffective, due to low levels of financial literacy and the complexity of many financial products and documents. Existing mechanisms, such as industry-led standards, often do not cover all issuers and distributors and are unenforceable.
The DDOs apply to financial products which are issued and distributed to retail customers and which require disclosure under the Corporations Act 2001 (Cth). They also apply to financial products regulated under the Australian Securities and Investments Commission Act 2001 (Cth). This includes insurance, asset management, superannuation, derivative and credit products. The DDOs only apply to the primary offering of a product. Exemptions apply for products which are covered by an existing product-specific regulatory regime, for example, margin lending facilities and securities issued under an employee share scheme.
Obligations on Issuers
The DDOs impose four primary obligations on issuers of financial products to retail customers:
- to make a written and publicly available target market determination for each financial product issued;
- to review each determination for appropriateness, both on a regular basis and in response to any events which the issuer identifies as review triggers;
- to keep records of each determination; and
- to notify ASIC of any significant dealings that are inconsistent with a determination.
The determination made for each product should describe the class of retail customers which make up the target market for the product, the distribution conditions (i.e. any conditions or restrictions on the distribution of the financial product, such as how and to whom it is sold) and any restrictions on dealing in or providing advice about the product.
Importantly, a determination must be appropriate, that is it should be formulated so that:
- if the product were to be issued to a retail customer in accordance with the distribution conditions, it is likely that the retail customer would be in the target market; and
- if the product were to be issued to a retail customer in the target market, it would likely be consistent with the customer’s objectives, financial situation and needs.
Obligations on Distributors
The DDOs impose five primary obligations on distributors of financial products to retail customers:
- not to distribute a product unless a determination is in place;
- not to distribute a product where it is aware that a determination may no longer be appropriate;
- to take reasonable steps to ensure that distribution is consistent with a determination;
- to collect, keep and provide distribution information and information on any product-related complaints to the issuer; and
- to notify the issuer of any significant dealings that are inconsistent with a determination.
These obligations apply to all retail product distribution conduct: that is, dealing in financial products, or providing financial product advice or disclosure documents, to retail clients.
ASIC Enforcement and Penalties
In addition to the DDOs, the Act grants ASIC significant new powers to enforce these obligations, including the ability to:
- request necessary information relevant to its regulatory role, such as distribution information and records of determinations;
- issue stop orders in relation to suspected breaches of the DDOs; and
- make any necessary exemptions and modifications to the DDOs.
Any breach of the DDOs may result in both civil penalty proceedings and criminal prosecution. The maximum criminal penalty is 200 penalty units or imprisonment for 5 years, or both. The maximum civil penalty is $200,000 for individuals and $1 million for body corporates.
Consumers who suffer loss or damage due to a breach of the DDOs may commence civil action. Further, the court, on application from ASIC, can make orders to benefit non-party consumers who suffer loss or damage due to breach of the DDOs.
Where to from here?
Draft regulations to supplement the Act have been released and are currently subject to a consultation process, but not yet finalised.3 Similarly, it is expected that ASIC will release regulatory guidance on the DDOs, with public consultation to begin towards the end of 2019.4
Although the DDOs do not come into force until 2021, retail issuers and distributors should begin to familiarise themselves with the new obligations and consider how to comply with them. Issuers and distributors may need to make substantial changes to integrate the DDOs into their existing product approval processes, product review and distribution standards. They will also need to consider potential determinations for each product they issue or distribute to retail clients.
1. For further information, please see our previous focus paper ‘Binary options and CFDs: first targets for ASIC’s new product intervention powers?’
2. Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 Explanatory Memorandum, at paragraph 3.8.
3. Corporations Amendment (Design and Distribution Obligations and Product Intervention Powers) Regulations 2018 (Cth).
4. ASIC Consultation Paper 313, at paragraph 6.
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