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A step closer to Design and Distribution obligations in financial services

On 20 July 2018, the Government announced a second round of consultation on revised draft legislation for Design and Distribution Obligations and Product Intervention Powers. The Government previously released exposure draft legislation for consultation which closed on 9 February 2018. Following consideration of the submissions received in consultation, a number of changes have been made.

Background

The Corporations Act 2001 (Cth) relies on disclosure to assist consumers understand and select appropriate financial products. In 2014, the Financial System Inquiry recognised that disclosure can be ineffective for a number of reasons, including complexity of documents and products and low financial literacy.

The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Power) Bill 2018 implements the Financial System Inquiry’s recommendation to introduce a targeted and principles-based product design and distribution obligation.

The new design and distribution obligations ensure that product offerors have a customer-centric approach in the provision of suitable financial products to consumers.

Who will it affect?

The obligations will affect product offerors such as insurers and asset managers who prepare product disclosure statements (“PDSs”). Distributors who arrange for the issue of products and distribute disclosure documents, such as fund managers, will also be affected.

Design and distribution obligations

Persons who design a PDS must:

  • make a target market determination in relation to the product;
  • review the target market determination as required to ensure it remains appropriate;
  • keep records of decisions about target market determinations and reviews; and
  • notify ASIC of any significant dealings in a product that are not consistent with the product’s target market determination.

A target market determination must, among other things, describe the class of retail clients that comprise the target market for the product and specify any conditions and restrictions on retail product distribution conduct.

All advertising and promotional material for a financial product must refer to the product’s target market.

Persons who distribute a PDS must:

  • not engage in retail product distribution conduct in relation to a product unless a target market determination has been made;
  • not engage in retail product distribution conduct where a target market determination may no longer be appropriate;
  • take reasonable steps so that retail product distribution conduct is consistent with the target market determination;
  • collect information specified by the issuer and complaints related to the distribution of a product and provide such information to the issuer; and
  • notify the issuer of a product of any significant dealings in the product that are not consistent with the target market determination.

Retail product distribution conduct involves dealing in relation to a retail client, providing financial product advice to a retail client, giving a disclosure document or PDS to a retail client, or making a recognised offer to a retail client.

Product intervention power

The new law gives ASIC power to enforce the new design and distribution obligations. The power includes the ability to request necessary information, issue stop orders and to make exemptions and modifications to the new obligations. There are civil and criminal penalties that apply to contraventions of the new arrangements.

Consultation on the second exposure draft closes on 15 August 2018.

If you have any questions about the Design and Distribution Obligations, please contact Hillary Ray or someone from our Financial Services Team.

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