Australian Securities and Investments Commission will now regulate companies who create (called an issuer) and distribute (called a distributor) financial products, to ensure they are complying with new design and distribution obligations (DDO). The DDO requires issuers and distributors of a financial product to:
- maintain a written record of the target consumers of a financial product; and
- collect data on an ongoing basis to ensure the product is only accessed and used by those target consumers.
This article provides a background on the DDO, who the DDO regime will impact, and a high-level summary of the new obligations that apply to issuers and distributors under the new regime.
The Background
The new DDO regime came into effect from October 2021. The relevant legislative provisions were added to the Corporations Act 2001 (Cth) as a new Part 7.8A. The DDO regime requires issuers and distributors of financial products to adopt a consumer-centric approach in designing and distributing financial products to consumers. Further, the intention is that the issuers and distributors consider the target consumers’ financial circumstances, goals, needs, and objectives to ensure the financial product is suitable for them.
The DDO regime moves away from the current emphasis on disclosures, financial literacy, and financial advice to ensure consumers only access and use financial products that are appropriate for them. Historically, the disclosure method included the issuers of financial products releasing an extensive product disclosure statement. The view was that consumers would read these statements and gain financial advice before accessing those financial products.
Additionally, the DDO requires the issuers and the distributors to take a more active role in ensuring the target consumers only access the financial products. Under the DDO regime, the issuers must prepare a written document called target market determination (TMD), which sets out the target market for a particular financial product. The distributors must comply with the TMD when distributing these products. Obligations of issuers and distributors in the DDO regime are provided in more detail below.
Who Will the DDO Regime Impact?
Subject to certain exceptions, the new DDO regime will affect all issuers and distributors of financial products. Further, financial products under the DDO regime are those that meet the definition of financial products under two important legislations:
- Corporations Act 2001 (Cth); and
- Australian Securities and Investments Commission Act 2001 (Cth).
However, certain types of financial products are exempt from the DDO. These include:
- MySuper Products;
- margin lending facilities;
- securities issued under an employee share scheme.
- most fully paid ordinary shares in a company; and
- certain types of credit facilities. Relevantly, this includes credit facilities provided wholly or predominantly for a business purpose.
Requirements for a Target Market Determination
Indeed, the primary obligation in the DDO regime is the requirement to draft and maintain a written document called a TMD. A TMD must include specific information in connection with the relevant financial product, including:
- the target consumers for the financial product. This would vary depending on the characteristics of the financial product, including its risk profile and complexity;
- how the financial product will be distributed, including any restrictions on the distribution;
- events that would indicate that the TMD is no longer appropriate for that financial product, therefore, triggering the need to amend the TMD to the extent required;
- details about the periodic review of the TMD, including when and how the TMD will be reviewed; and
- the reporting obligations of the distributors, including the type of information that must be reported.
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Obligations of the Issuers and Distributors of Financial Products
Under the DDO regime, issuers are the financial service company that creates the financial product. On the other hand, distributors are those that distribute the financial product to targeted consumers. As noted above, an issuer is responsible for preparing the TMD and maintaining it. It is also responsible for:
- making the document publicly available;
- ensuring the TMD remains appropriate for the financial product; and
- keeping any relevant records in connection with the financial product.
Whereas, obligations of a distributor under the DDO include:
- only distributing financial products that have a TMD;
- taking reasonable steps in line with the TMD when distributing financial products; and
- keeping any relevant records in connection with the financial product.
Key Takeaways
The design and distribution obligations regime is a new regulatory regime introduced under the Corporations Act 2001 (Cth). The regime requires the issuers and distributors of financial products to adopt a consumer-centric approach. Additionally, the purpose is to ensure that only the targeted consumers access and use the financial products this regime captures, including credit products. However, certain financial products are exempt from the regime, including credit facilities provided wholly or predominantly for business purposes.
If you want more information about the DDO regime or would like guidance on how to comply with these obligations, LegalVision’s regulatory and compliance lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
The design and distribution obligations (or DDO) requires issuers and distributors of a financial product to maintain a written record of the target consumers of a financial product and collect data on an ongoing basis to ensure only those target consumers access and use the product.
The new DDO regime affects all issuers and distributors of financial products. Further, ‘financial products’ is as defined in the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth).
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