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On Friday 11 December, the regulator released the much anticipated final guidance (RG 274) on the Design and Distribution Obligations (DDO). RG 274 sets out ASIC’s expectation of how the regime will operate, as well as their approach to administration. It comes just shy of a year after of the release of the consultation paper and draft regulatory guide, with DDO coming into effect as of 5 October 2021.
The RG takes into consideration the consultation process and feedback received, but has not materially changed. We expect that inclusion of ‘appropriateness requirements’ will lead to issuers bolstering parameters within target market determinations (TMD), but that the infrastructure sitting around that TMD (frameworks, methodologies, and rationales) will remain unchanged.
Below we have set out a number of the key areas for investment managers and superannuation trustees.
The RG provides specific example review triggers for managed investment schemes which include the product’s liquidity, performance relative to objectives and benchmarks, and increases in fund outflows. These are review triggers that we have already seen many managers include in their TMDs, however, it is still useful for organisations to have confirmation of their approach.
The final guidance has confirmed that issuers of investment products should not assume that consumers will hold the product as part of a diversified portfolio. Reliance on portfolio diversification has not been a common approach across the industry, however this confirmation reemphasises the need for issuers to critically assess the risk of consumers obtaining the product on a standalone basis as well as the value it offers. Issuers should take reasonable steps (which would be tailored to the product type and distribution strategy) to prevent distribution outside of the target market.
Superannuation product attributes
The RG has confirmed that investment options and insurance components of Choice superannuation products are key attributes that could affect the class of customers for whom the product is appropriate.
ASIC expects that in the case of investment options, trustees are likely to need a single TMD for the superannuation product that includes sub-markets for individual investment options or groups of options.
Trustees will also need to consider whether the inclusion of insurance changes the target market class of customers for the product. In particular, ASIC expects trustees to consider members for whom insurance is unlikely to be appropriate. The attributes and eligibility criteria of the insurance component should also flow through to the distribution conditions articulated within the TMD.
Exchange traded products
ASIC has provided specific guidance for the issuers and distributors of exchange traded funds (ETF) to reflect their distribution on financial markets.
ETF issuers will still be required to produce a TMD but will not need to cease on-market distribution of the product if that TMD becomes inappropriate. In addition, the issuer, in fulfilling its reasonable steps obligation, will not be required to ensure each on-market transaction is consistent with the TMD (although it is still expected that issuers will monitor the conduct of brokers).
Distributors will only be required to comply with obligations to report complaint information and any other information that an issuer specifies in the TMD.
What does this mean for organisations?
Although, as expected, the final RG has not materially changed the implementation of the obligations for issuers and distributors, there is still significant work to be done in preparation for October 2021. Organisations should review their approach to DDO in light of the new RG and make use of the sector-specific examples that ASIC has provided, tailoring them to their own product sets.
Rosalyn is a partner in Deloitte's Melbourne office in the Governance, Regulation and Conduct practice. She specialises in supporting firms to design and assess frameworks to treat customers fairly, including the development of conduct, product governance, sales practices and complaints handling frameworks.
Simon is a Director in Deloitte’s Investment, Wealth and Treasury team. He specializes in working with clients to implement regulatory change, develop risk management frameworks and improve the efficiency and effectiveness of Compliance functions.
The consultation process and public hearings on Design and Distribution Obligations (DDO) and Product Intervention Powers (PIP) are now complete. After an 18 month consultation process, it has been recommended the legislation be passed.