In advising our clients on the new design and distribution obligations (DDO) regime, we have discovered some surprising findings. In a series of articles, we will highlight some key issues you need to be aware of. First up, we look at a delay and first mover problem.
What is the DDO regime and who does it impact?
The DDO regime under the Corporations Act commences on 5 October 2021. It will require a new way of manufacturing and distributing financial products. DDO affects both product issuers and product distributors.
Although the start date seems months away, the obligations are complex and will take time to comply with. Product issuers will need to design and implement product governance arrangements applicable to the DDO that covers the design, distribution and monitoring and review phase.
What are we finding?
In our discussions with client and industry participants, we are finding that many industry participants, particularly mid-market financial services firms, have been passive in thinking about and implementing the regime.
Some mid-market financial services firms are hoping to leverage off larger firms, or off industry groups. Others, such as financial advisers, wrongly consider that DDO does not apply to them at all (we will address this further in a subsequent article).
Some smaller boutique firms or persons who are exempt from the AFS licensing requirements may also think that they are not captured under the DDO regime – however, this should not be assumed given the technicality of the DDO legislation.
ASIC has stated that it does not intend to defer the commencement date of DDO any further, and that it expects the industry to be compliant come 5 October.
What should you do?
Mid-size financial services firms can no longer delay in thinking about and implementing the DDO regime. You should develop your own processes. Industry groups are focused primarily on target market determinations (TMD) and standardisation of information flows, whereas each financial services firm will need to do its own thinking about key questions, such as the taking of reasonable steps and determining the criteria for significant dealings.
All stakeholders within firms (especially Product and Sales teams) should understand that compliance with the DDO regime will not simply be a matter of checking a few extra boxes for legal and compliance, or simply completing an industry standard TMD. TMDs are a small (albeit an important) part of the compliance matrix.
The overall governance arrangements cannot be outsourced or simply borrowed from an industry group or a larger player. The shift to DDO may mean, for example, that no suitable target market can be identified for a product in its current form, or that products need to be calibrated depending on whether they will be issued directly to consumers or through intermediated distribution channels. Firms need to review and may need to alter their distribution practices to ensure that they comply with their reasonable steps obligations. It may also mean that firms need to take steps to identify and cease their relationships with distributors who pose an unacceptable risk of consistently selling a product to inappropriate consumers.
It may be that firms’ pre-existing product design and development practices reflect the policy purpose behind DDO – the mitigation of consumer harm – however, these practices will still need to be documented and reviewed in accordance with ASIC’s expectations, and reviewed to ensure compliance with DDO requirements.
Our message is simple: financial services firms should be actively taking stock of if and how they are affected by the DDO regime, and taking steps to become compliant by October.