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Almost a year after the release of its draft regulatory guide, ASIC has released its final guidance (RG 274) on the Design and Distribution Obligations (DDO). This explains the regulator’s interpretation of the requirements, expectations for compliance and general approach to administering the obligations. With issuers and distributors set to be caught by the regime in under a year, from 5 October 2021, the industry has breathed a collective sigh of relief that the guidance has remained materially unchanged.
Below we have set out the key considerations for banks.
Consider ‘appropriateness requirements’ in making a TMD
When developing a target market determination (TMD), issuers will be required to consider both ‘content requirements’ and ‘appropriateness requirements’. ASIC has provided further guidance on its interpretation of the ‘appropriateness requirements’ and how these will impact the public facing TMD document. The regulator confirms at RG 274.68 that to satisfy this requirement, the TMD must include sufficient information on why the product is likely consistent with the objectives, financial situation and needs of the class of customers. This will generally result in the TMD setting out a description of:
While the term ‘negative target market’ is no longer reflected in the guidance, the construct remains key and should be considered. This is contemplated at RG 274.85, where the regulator notes that in some cases it may be simpler or even necessary to define the target market by excluding others.
We expect that some revisions will likely need to be made to working drafts of TMDs to bolster the description of the target market, but that it is unlikely to require any wholesale changes to policies, frameworks or methodologies that banks may have in-flight in response to DDO.
In selling multiple products as a bundle, ASIC has noted that the issuer can decide whether to comply with the ‘content requirements’ and the ‘appropriateness requirements’ by preparing one TMD for the bundled product, or numerous separate TMDs for each product within that bundle. It is expected that in most cases, a target market for a bundled product will be narrower than a target market for products sold separately.
Example 8 in RG 274 has been added to demonstrate the need for the issuer to identify the overlap between the target market for a home loan and a credit card when selling separately in order to identify the target market for the bundled product.
This change acknowledges the varied interpretations of how to structure TMDs for bundled products that ASIC received through the consultation process. It is unlikely to have any major impacts on issuers, given the flexibility ASIC is willing to apply.
Interaction with personal advice obligations
In-line with the draft guidance, ASIC maintains that a financial adviser should consider the TMD for a product when providing personal advice and meeting their best interests duty. Noting that a financial adviser is not required to meet the reasonable steps obligation under DDO in providing financial advice.
Additional guidance has also been provided at RG 274.204 in relation to the implementation of personal advice by distributors who are not associated with the advice provider.
It is likely that organisations will be reviewing their current approach to responsible lending obligations, as well as its extension to best interest duties, and embedding DDO appropriately into these processes.
Amendments to product sector examples
While ASIC declined to provide a definitive formulation on how issuers ought to describe a target market, the regulator did provide a series of examples. This included an example on credit cards, and an example on basic banking products.
In relation to the credit card example, additional clarification has been included by way of example 14, which reiterates that when adding a new promotional feature to a product, the issuer must consider whether this has the effect of varying the product such that the target market would need to be adjusted.
In relation to the basic banking product example, this has been amended to reflect the recent changes to the Banking Code of Practice, and the interaction with the provisions addressing the design and distribution of basic accounts or other low or no fee transaction accounts.
Interaction with disclosure relief
There has been some conversation across the industry as to whether a product which has previously qualified for relief from disclosure would qualify for relief from DDO. ASIC has confirmed that in circumstances where they have granted disclosure relief for products through legislative instruments, relief from DDO will not automatically follow. In each case, a product’s eligibility for exemption from DDO will be assessed separately from the assessment of disclosure relief.
What does this mean for banks?
While the guidance has not materially changed, it does reaffirm ASIC’s position on DDO implementation, and its expectation of how banks will manage DDO in a BAU environment. We anticipate that DDO programs will be accelerated in the new year, as issuers and distributors continue to grapple with the organisational-wide impacts of this product governance overhaul.
Given ASIC’s acknowledgement on the standardisation of certain DDO components, for example content and form of TMDs, information sharing with distributors and reporting periods, we expect to see industry groups leveraged as a vehicle to achieve this.
On the whole, a substantial amount of work still needs to be undertaken in readiness for 5 October 2021.
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.
Georgia is a Manager in the Governance, Regulation and Conduct practice based in Brisbane. She specialises in supporting clients across the financial services sector in designing, implementing and reviewing frameworks, policies and procedures focused on preventative conduct and promoting good customer outcomes.
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.