personal advice product governance product design and
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OverviewOn 11 December 2020, the Australian Securities and Investments Commission (ASIC) released its final Regulatory Guidance on DDO (RG 274) for implementation on 5 October 2021. The legislation for the DDO regime was passed in April 2019. It’s time to act and plan now as the impacts of DDO are far-reaching across organisations.
What are some key callouts?Product governanceProduct governance is central to DDO. It calls upon designing, documenting, implementing and reviewing appropriate product governance procedures, which enable monitoring of actual consumer outcomes.
Product design and distribution obligations (DDO)Regulatory Guide 274December 2020 update
Choice architectureChoice architecture is a key pillar of the obligations, both at a product design level, and also from a sales practices perspective. The impact of choice architecture decisions will go some way to evidencing ‘reasonable steps’.
Data analytics capabilityCollecting and analysing reliable consumer, product performance and transaction data is fundamental to understanding your products and actual outcomes delivered to consumers. This may require enhanced data analytics capability.
Personal adviceCertain obligations do not apply when personal advice is provided. When personal advice is provided, a distributor is not required to take “reasonable steps” to ensure distribution is consistent with the TMD. However a TMD should be considered by financial advisors as distributors, in providing advice and in meeting the best interests duty and they are required to collect and report information to issuers.
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Key enhancements made by the final Regulatory Guide
ASIC introduced an instrument (Instrument 2020/1090) specific to exchange traded products (i.e. exchange traded funds “ETFs”) and how the design and distribution obligations will relate. These changes included specific guidelines around how long the TMD for the product must apply (12 months from resale) as well as changes to the requirements of the TMD reviews for exchange traded products.
Exchange traded products
The TMD must be publically available before a product is distributed.
New Issuer obligation
ASIC provided further details on what reasonable steps could be for issuers and distributors.
Reasonable steps
Additional terms introduced including; key attributes (features and attributes of a product that affect whether it is likely to be consistent with the likely objectives, financial situation and needs of consumers in the target market) and appropriateness requirements (an assessment done as part of completinga TMD).
Additional terms
Further expectations around monitoring and measuring actual consumer outcomes once a product is in the market to conclude on the appropriateness requirement.
Actual consumer outcomes
Issuers and distributors must implement and maintain robust and effective product governance arrangements to ensure that they comply with the design and distribution obligations. Product governance arrangement focus on measuring and monitoring actual consumer outcomes and are expected to be documented, implemented as well as regularly reviewed.
For monitoring and review, product governance arrangements must provide an ongoing, iterative and responsive design and distribution process. An issuer should draw on information reasonably available about how consumers are using its product and the actual consumer outcomes.
Product design
Target market
Monitoring and review
Product distribution
The regulatory guide provides examples of what products are included and excluded, as well as types of distributors.
Who is covered?
Issuers include persons who:• Issue a financial product; and• Must prepare a disclosure document under the
Corporations Act
Distributors means regulated persons, including:• AFS licensees; and authorised representatives;• Credit licensees; • Credit representatives; and• Some referrers (additional guidance provided)
A continued and strengthened focus on the need to have robust documented product governance arrangements in place.
For product design, a product development process that does not consider consumer outcomes will not be feasible. This includes designing a new product, as well as reviewing the design of a continuing product.
At the product distribution stage, product governance arrangements must include a process for effective communication between issuers and distributors, and ensure there are appropriate processes and controls to support “reasonable steps” and reduce the risk of distribution to consumers outside the product’s target market.
Products covered
• Products for which a Product Disclosure Statement (PDS) must be prepared under Pt 7.9 of the Corporations Act. For example: general insurance, and interests in a superannuation fund;
• Securities for which a disclosure document must be prepared under Pt 6D.2 of the Corporations Act. For example: hybrid securities;
• Other ‘financial products’ within the definition of Div 2 of Pt 2 of the ASIC Act. For example: credit cards, home loans, and funeral expenses policies; and
• Products prescribed by the Corporations Regulations as requiring a TMD. This includes, but is not limited to:- Basic banking products;- Depository interests in simple corporate
bonds;- Exchange traded products (ETPs);- Investor directed portfolio services (IDPSs); and- Certain custodial arrangements
Products excluded
• MySuper products;• Margin lending facilities;• Fully paid ordinary shares in a company;• Securities issued under an employee share scheme;• Products prescribed by the Corporations Regulations
as not requiring a TMD. This includes, but is not limited to:- Interests in eligible rollover funds;- Defined benefit superannuation;- Credit facilities that do not involve incurring a
deferred debt (e.g. consumer leases);- Medical indemnity insurance;- Depository interests in foreign fully paid ordinary
shares;- Bank drafts and Australia Post money orders; and- Credit provided for business purposes
Prepare a TMD (new guidance)The TMD must:• meet specific content requirements;• meet ‘appropriateness requirements’
(new guidance), this involves:● considering how ‘key attributes’ of
the product are consistent with the likely objectives, financial situation and needs of the consumers; and
● conduct a critical assessment. ASIC has provided critical assessment questions about purpose of the product (i.e. does it fulfil well-founded need for consumers); past outcomes and likely future outcomes
Make the TMD publicly available(new obligation)• A person who makes a TMD must
ensure that it is available to the public free of charge before any person distributes a financial product. This applies to new products and existing products that continue to be offered
• Promotional material in relation to products must describe the target market or specify where the TMD is available
• Timing of when TMDs are made publicly available will be a key milestone in a project plan
Taking reasonable steps (new guidance)• ASIC outlines factors that are relevant
to their administration of the issuer’s reasonable steps obligation. These factors include: - Distribution conditions- Marketing and promotional
materials- Selection of distributors- Supervision and monitoring- Conflicts of interest- Information sharing with distributor.
Obligations for issuersThere is a need for improved data capabilities, evidencing reasonable steps, identifying the key attributes of a product and conducting a critical assessment of the TMD.
Product specific issues and the TMD• Further detail is provided on bundled
products, customisable products, investment products and diversification
• For superannuation, the link between DDO and Member Outcomes, albeit distinct regimes, are highlighted as complementary. ASIC and APRA issued a joint letter on this topic on 15 December 2020
Reviewing the TMD• To ensure the TMD remains
‘appropriate’, issuers must review the TMD:- periodically;- in response to review triggers; and- when other events or
circumstances reasonably suggest the TMD is no longer appropriate.
• To meet their review obligation issuers and distributors may need to improve their data capabilities to ensure that their data is timely, accurate, adequate and complete
Distribution, review and reporting under the TMDThe issuer must:• Specify why the distribution
conditions are appropriate • Notify ASIC of ‘significant dealings’• Keep accurate records of decisions
made in relation to TMD as well as the relevant data used
• Specify when information is to be provided by the distributor; for complaints a reporting period of a year or greater will likely be inappropriate
Obligations for distributorsDistributors will need to understand the information needs of their issuers and enhance their data and reporting abilities to meet expectations. Reasonable steps must also be clearly articulated and communicated to issuers.
TMD must be made before distribution
• A distributor may distribute a product if they reasonably believe (after making all reasonable inquiries) that a TMD has been made, or that a TMD is not required
Notify the Issuer of significant dealings
• If a distributor becomes aware of a significant dealing in the product that is not consistent with the TMD, they must notify the issuer as soon as practicable (within 10 days)
Keep records and reporting information:
A distributor must keep complete and accurate records of distribution information, including:
• the number of complaints received about the product; and
• information specified by the issuer in the TMD
Take reasonable steps (new guidance)
• Simply complying with the distribution conditions and any agreement with the issuer will not be sufficient to satisfy the distributor's reasonable steps obligation.
• ASIC outlines factors that are relevant to their administration of the distributor’s reasonable steps obligation. These factors include: - Compliance with distribution conditions;- Distribution method;- Marketing & promotional material – materials and
delivery should be informed by and consistent with the TMD for the financial product;
- Effectiveness of product governance arrangement;- Inappropriate incentives;- Sufficiency of training for staff involved in distribution
arrangements; and- Assessment of whether a consumer is in the target
market● Reference to taking “reasonable steps” includes setting
standards for how distributors behave with vulnerable customers
Calls to action
Contact us to find out more
Move now, get ahead
Have you considered the impact of DDO for your organisation and your customers? Our global experience suggests effort should not be underestimated as DDO is broadreaching.
Identify & Align Stakeholders
Aligning internal and external stakeholders on criteria for TMD will take time to achieve.
Connecting in with distributors and distribution networks as key stakeholders is important to consider early.
Know Your Data
Gaps and/or data issues with existing product specifications will likely require IT, Products and Business support to remediate. This may open the door for simplification.
GAP Analysis
Have you performed a readiness review to identify areas requiring uplift in your organisation and to support your project plan?
Link In & Do Once
Have you considered how other legislation may impact your DDO efforts? Is there duplication? Is one solution possible? For example, Member Outcomes, Financial Accountability Regime, etc.
Governance
Have you considered overarching governance, accountability and reporting requirements? Which stakeholders and capabilities will need representation in your product governance working group?
Scope
Have you reviewed and determined your in-scope products and obtained sign off from accountable stakeholders.
Managing risk through controls
Have you considered who is giving assurance on the design and operating effectiveness of key controls, in particular distribution controls, that mitigate risks that you are responsible for?
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Sean HillPartner – Superannuation
Bernadette D’AlessandroDirector – Banking and Regulatory Assurance
Rebecca OttoSenior Manager – Financial Services Insurance
Sarah HofmanPartner – Regulatory Assurance
Deanna CheslerPartner – Regulatory Assurance
Thea KnightSenior Manager – Behavioural Economics
[email protected] Zealand
Nathan BonariusDirector – Superannuation
Anna MartinSenior Manager – Digital Transformation
Diane WinnardDirector – Regulatory Assurance Financial Services