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As organisations navigate through the final stages of DDO preparation before go-live on 5 October 2021, defining the approach to third-party distribution has proven to be a challenge for issuers of financial products.
Under Regulatory Guide 274 (RG 274), issuers must take reasonable steps to ensure that products are sold to their intended target market. Where products are sold to consumers through third-party distributors (including financial advisers), issuers of the product must specify what information these third-party distributors should provide to issuers, and how often that information should be provided.
The management of third-party distributor relationships plays a critical role in the success of an issuer’s ability to comply with its obligations under DDO. The challenge currently facing issuers is how best to balance complying with their reasonable steps obligations under DDO, while adopting a practical and commercial approach.
Anticipating the complexities of third-party monitoring and due diligence
As issuers consider their reasonable steps obligations under DDO, it may become apparent that ongoing monitoring and due diligence of their third-party distributors can be a complex and time-consuming task. In anticipation of this challenge, issuers should proactively be:
Adopting this approach well before the DDO go-live date may provide issuers with insights on the existing reporting capabilities of their third-party distributors and whether their current oversight of third parties is sufficient for issuers to comply with their reasonable steps obligations. Identifying concerns early gives issuers adequate time to consider what their next steps should be, including the development of business and strategic initiatives on how best to approach their third-party distributors where uplift is required.
The regulatory overlap between DDO and Internal Dispute Resolution (IDR)
Under the DDO legislation, third-party distributors are required to report complaint related information to issuers. Additionally, third-party distributors are required to report to issuers even where no complaints were received in the previous reporting period.
The challenge faced by issuers, to ensure they are satisfied that they have complete and accurate data to enable effective monitoring, is the level of granularity of complaints related information to request from their third-party distributors. When considering this challenge, it is prudent for issuers to consider the overlapping obligations between DDO (RG 274) and the updated Internal Dispute Resolution (IDR) regulations (RG 271), which also takes effect on 5 October 2021.
For example, under RG 271, organisations must provide internal reporting to senior management and their Board of Directors on a regular basis. ASIC lists the information that should be included for internal reporting, which may serve as an indication to issuers of the type of product specific complaint related information that it may request from third party distributors to comply with DDO under RG 274. This includes:
Issuers should therefore consider building data and analytics functionality as part of their internal systems to filter for product specific complaints relevant to DDO. Additionally, robust processes and controls should be implemented to ensure there is a strong level of categorisation of complaints in order to assess trends, identify potential systemic issues and perform thorough root cause analysis. Doing so would better inform issuers of their products and ultimately their compliance with the DDO obligations.
Proactive engagement with third-party distribution networks is vital
Issuers should proactively begin engaging with their third-party distribution networks to better understand their ability to capture, record and report information back to issuers. A transparent view of the data, system capabilities and functionality of these third-party distribution networks is vital in ensuring compliance with the relevant regulatory obligations by 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.
Kavir is a Manager in Deloitte’s Governance, Regulation and Conduct Practice. He specialises in supporting banking and insurance clients navigate through regulatory change, with a focus on designing and implementing conduct 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.