An extensive list of banking products will be covered by design and distribution obligations that take effect next year, according to new ASIC guidance.
ASIC has released a regulatory guide (RG 274), setting out its expectation for compliance with the new design and distribution obligations that take effect next year and its interpretation of those obligations.
The meaning of a financial product for DDO purposes includes: any product that requires a product disclosure statement; securities for which a disclosure document must be prepared, such as hybrids; credit contracts regulated under the National Consumer Credit Protection Act, including credit cards and home loans; short-term credit contact not covered by the NCCP Act; debentures; depository interests in simple corporate bonds; basic banking products as defined in the Corporations Act, exchange traded products and investor directed portfolio services; and certain custodial arrangements.
Ordinary shares (unless the company is an investment company) are excluded, along with MySuper products, margin lending facilities, securities issued under an employee share scheme, depository interests in foreign shares, and Australia Post Money orders.
Interestingly “credit facilities that are not issued in the course of a business that is wholly or partly a business of providing credit” are not subject to the obligations. Credit provided for business purposes is excluded, along with consumer leases and the provision of credit by a pawnbroker.
From October 2021, financial services companies will have to provide target market determinations for retail financial products. They will also have to meet distribution, record-keeping and reporting requirements.
A target market determination must describe the class of retail clients that comprise the target market for the product, specify any conditions or restrictions on sale, specify events and circumstances that would suggest that the determination is no longer appropriate, and specify review periods.
DDO, which was a recommendation of the 2014 Financial System Inquiry, is intended to help consumers get appropriate financial products by requiring issuers and distributors to have a consumer focused approach to the design and distribution of their products.
Issuers must design products that are likely to be consistent with the objectives and financial situation of intended consumers and they must take reasonable steps to ensure their products reach consumers in the target market.
They must monitor consumer outcomes and review their products to ensure consumers are getting the products that are likely to be consistent with their objectives. They must also review their target market determinations.
ASIC’s guidance emphasises that governance must be “effective and robust”. It says: “The Financial System Inquiry highlighted that weaknesses in processes for, and controls on, product distribution to consumers have led to significant consumer losses.”
Product reviews will have to focus whether there have been changes to product features or the way products are distributed.
Product issuers and distributors will have to analyse expected distribution methods for the product to determine to determine whether it is reasonable to conclude that the product will likely be distributed to its target market and not outside its target market.
The description of target markets will have to have “sufficient granularity” and descriptions that are too