ASIC Has New Powers As DDO Becomes Law

The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers or DDO) legislation was passed by parliament last week. The law introduces a design and distribution obligations regime for financial services firms as well as a product intervention power for ASIC. We’ve previously written about the importance of this legislation, but here we take a more detailed look at what the potential outcomes will be for advisers, licensees and product manufacturers.

In a media release, ASIC welcomed the passage of the new laws and stated that “The design and distribution obligations will bring accountability for issuers and distributors to design, market and distribute financial and credit products that meet consumer needs”

Phased in over two years, this will require issuers to identify in advance the consumers for whom their products are appropriate, and direct distribution to that target market. ASIC's product intervention power are effective immediately. Find out the justification for why the laws were needed here.

Outcomes

DDO is like an “insurance policy” against best interest test by ensuring consumers are treated fairly and products are suitable, where that product is provided as part of an advised relationship. Financial product manufacturers will have to better understand how advisers and advice businesses are assessing customer requirements and matching the right products to their circumstances. 

Know Your Adviser (KYA)

To ensure compliance with the new laws and to protect themselves from negative consequences, it will be incumbent on financial product manufacturers to seek greater insight into how the licensees and advice firms who distribute their products are structured and operating. We will likely see a sharper focus on the groups they choose to work with, rather than taking a scattergun approach to winning revenue by any means.

Third party sources of information may be sought, to enrich the understanding for manufacturers of how their products are being applied for consumers. This could include crowd-sourced assessments by advisers of licensees and vendors, crowd-sourced assessments by consumers of their advice experience, and other more empirical assessments. 

D2C Challenges

For fund managers, many of whom are seeing the Direct 2 Consumer market as an increasingly important part of their multi-channel strategy, the DDO laws are directly applicable for promotion of listed product like mfunds, ETFs and LICs. How far these manufacturers have to go to establish target market, fit and suitability is unclear when the very nature of exchanges is that the manufacturer has no visibility of the end customer. 

Niche Advising

This dynamic potentially mirrors an equivalent development occurring for advisers as they seek to evolve their business models in a post-Royal Commission world. Apart from transitioning away from commissions and other forms of conflicted remuneration, another likely response is advice businesses narrowing their span of control to concentrate on specific areas of expertise, types of clients or stages of life.

This “niching” can help drive operational/cost efficiencies, reduce risk by tighter controls under a narrower business model, raise margins by regaining some price-setting advantages (ie. like a medical specialist / surgeon) and potentially greater client loyalty due to improved adviser-client matching which would help drive better rapport and clear service expectations.

ASIC Interrogation

ASIC is already starting to focus more on the mid-tier and smaller licensees around conduct, quality of surveillance, and other risk management considerations. These investigations will lead to an increased understanding across the industry about what is deemed acceptable or not, what is deemed within safe boundaries of behaviour and process and what’s not.

Enforcement and penalties

The laws give ASIC powers to enforce the new arrangements. These include the ability to request necessary information, issue stop orders where there is a suspected contravention of the law and to make exemptions and modifications to the new arrangements. These powers are similar to those that ASIC has under the current disclosure regime.

There are civil and criminal penalties that apply to contraventions of the new arrangements. The combination of civil and criminal penalties allows ASIC or the prosecutor (as the case may be) to take a proportional approach to enforcing the new obligations. In addition, a person who suffers loss or damage because of a contravention of certain new obligations may recover that loss by bringing a civil claim. Criminal penalties range from 12 months to 5 years in prison and civil penalties of up to $200,000 for individuals and $1 million for corporates.

Key Points in Passed Legislation

The new laws are designed to assist consumers to obtain appropriate financial products by requiring issuers and distributors to have a customer-centric approach to designing, marketing and distributing financial products. The "Target Market" determination is crucial.

The design obligations are:

1. to make a publicly available target market determination;
2. to review the target market determination as required to ensure it remains appropriate;
3. to keep records of the person’s decisions in relation to the new regime; and
4. to notify ASIC of any significant dealings in a product that are not consistent with the product’s target market determination.

The distribution obligations are:

1. not to engage in ‘retail product distribution conduct’ in relation to a product unless a target market determination has been made; – ‘retail product distribution conduct’ is, in relation to a product, dealing in relation to a retail client, providing financial product advice to a retail client, or giving a disclosure document or PDS to a retail client;
2. not to engage in retail product distribution conduct where a target market determination may no longer be appropriate;
3. to take reasonable steps so that retail product distribution conduct is consistent with the target market determination;
4. to collect information specified by the issuer and complaints related to a product and provide both to the issuer; and
5. to notify the issuer of a product of any significant dealings in the product that are not consistent with the products target market determination.

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