New Product Design and Distribution Obligations. Are you Ready?
Is your financial services business prepared for the new Product Design and Distribution Obligations?
It has been almost a year since ASIC released Consultation Paper CP 325 Product design and distribution obligations, December 2019 to be exact. The consultation period, in which ASIC sought feedback from the industry on the obligations, concluded in March of this year.
Though the final Regulatory Guide (RG) is yet to be released, there are steps you should start taking today to be ready to meet the new requirements.
At Hall Advisory, we have reviewed the draft RG 000 attached to CP 325 and summarise the key things you should know in this blog.
What is the purpose of the obligations?
The Financial System Inquiry revealed shortcomings of the existing disclosure regime for financial products and recommended that product issuers and distributors take more responsibility for the design and distribution of financial products to improve consumer outcomes.
This prompted the introduction of the design and distribution obligations, to encourage the design of products that are ‘fit for purpose’ and help consumers acquire financial products more appropriate for their needs and circumstances.
ASIC is encouraging a more customer-centric approach to the design and distribution of financial products.
Who do the obligations apply to?
The obligations apply to issuers and distributors of retail financial products.
For issuers, this includes those required to prepare a disclosure document under the Corporations Act and those who issue a product without the requirement of a disclosure document (e.g. issuer of a funeral expenses policy).
For distributors, this includes any regulated persons as defined in section 1011B of the Corporations Act 2001, including Australian financial services licensees and authorised representatives.
Some entities may be subject to distribution requirements but not design requirements.
For example, a financial adviser, as one who interacts with the end consumer, is a distributor and only subject to the distribution requirements. However, when providing personal advice, certain regulatory obligations (e.g. reasonable steps) do not apply. Instead, financial advisers are under legal obligations to consider the consumer’s personal circumstances and advise in the consumer’s best interests.
Not all financial products are subject to the new obligations. The table below shows the products to which the obligations apply:
What are the key requirements?
Obligations for distributors
Given the breadth of financial products on offer across the market, proposed guidance is high level and principles based. ASIC communicate the responsibility of product issuers and distributors to determine what is appropriate based the product in question and the relevant target market.
Timelines for your calendar
At the time CP 325 was released, the proposed deadline for compliance was 5 April 2021. Since then, ASIC has provided a 6-month regulatory reprieve due to the impacts of COVID-19.
This has shifted the deadline to 5 October 2021.
Key steps to implement
To comply with the new obligations by 5 October 2021, there are a few key steps you will need to undertake within your business.
1. Where to start?
With compliance obligations, a gap analysis is a good place to start. Review your existing product governance processes and procedures against the key requirements to identify any current compliance gaps. For example, you may have a description of the target market developed as part of marketing efforts, however, no formal target market determination is in place.
After identifying the gaps, build out a plan to close those gaps.
2. What documents or frameworks are needed?
ASIC suggest the development of a documented product governance framework covering products on offer. This is a collection of the systems, processes, procedures, and arrangements implemented for compliance with the design and distribution obligations.
Although this is not a requirement, this should help you meet the obligations and demonstrate compliance to ASIC.
3. What should they cover?
The framework should cover all product-related activities impacted by the design and distribution obligations. This comprises design, distribution, information sharing between issuers and distributors, outcomes monitoring and product reviews.
4. Who should be involved?
The development of the product governance framework should be a combined effort between product owners and development teams, the risk and compliance function and those who distribute and interact with the consumer (e.g. financial advisers).
Input from the relevant stakeholders is needed to effectively integrate the framework into day-to-day business operations.
5. How is the target market determination implemented?
ASIC sees a robust product governance framework as one that focuses on the identified target market across the lifecycle of the financial product. It is designed to reduce the risk of products being sold to consumers that are inconsistent with their objectives, financial situation and needs.
In theory, this means the framework should be centred on the target market determination. This determination should drive the product design process and can be used as a reference point to develop appropriate criteria for product approval.
The target market determination must also be made publicly available.
Once a target market determination has been developed, assess whether existing products meet the needs of the identified target market. You will need to leave sufficient time to re-design before the October 2021 deadline, should any products be deemed as inappropriate for the relevant target market.
Implications of non-compliance
Product intervention powers have recently been added to ASIC’s regulatory toolkit. This allows ASIC to temporarily intervene when there is a risk of significant consumer detriment. For example, ASIC has undertaken enforcement action for unsolicited ‘cold call’ telephone sales made by insurers.
This means that a breach of the new design and distribution obligations may result in enforcement action by ASIC and a liability incurred for remediation.
Compliance with the pending requirements will position you on the right side of regulation and protect your business from being subject to any regulatory action.
How we can help you
If you are yet to take steps toward compliance, start today.
Don’t know where to start? Hall Advisory would be happy to support you through the process. We specialise in governance, risk, compliance, and strategic advisory services across the financial services sector.
To help you meet the design and distribution obligations (DDO), we can assist with:
· Developing and implementing a tailored DDO framework.
· Aligning your existing policies and procedures to the developed DDO framework to ensure consistency.
· Compliance training for your staff on the DDO regime post approval of the new framework, to help integrate the framework into the culture of your business.
Contact us for a confidential, no-obligation consultation to discuss your business’ needs and how we can best help you.