ASIC regulatory guide on product design and distribution obligations

The Australian Securities and Investment Commission (ASIC) has released a new regulatory guide on the product design and distribution obligations.

ASIC Acting Chair Karen Chester said, “The design and distribution obligations are a game changer. They are designed to embed a consumer-centric approach and assist industry to deliver better outcomes for consumers while managing non-financial risks and avoiding costly remediation.”

Regulatory Guide 274 Product design and distribution obligations sets out:

  • the financial products to which the design and distribution obligations apply;
  • ASIC’s interpretation of the obligations; and
  • ASIC’s administration of the obligations.

Chester said, “ASIC’s guidance was greatly enhanced by the valuable input received from industry through an extensive consultation process. Engagement with industry was particularly important as the obligations require firms to set their own boundaries to suit their business, products and customers. If they stay within these boundaries this will mean less enforcement action from ASIC and the opportunity for deregulatory initiatives over time.”

The design and distribution obligations (DDO) require firms (product manufacturers, issuers, etc) to clearly identify the intended (target) market when designing financial products, and requires distributors (insurance brokers, insurer sales agents) to distribute products in accordance with the insurer’s target market. The DDO legislation was passed by Parliament in 2019 following a recommendation of the Financial System Inquiry. The new regulatory guide addresses demand from industry for ASIC guidance as they prepare for the obligations to take effect on 5 October 2021. This follows a two year transition period and a six month deferral of commencement provided by ASIC due to the impacts of COVID-19.

NIBA CEO Dallas Booth said it is disappointing ASIC did not engage more effectively during the development of the new Regulatory Guide. NIBA has been calling for ASIC to outline the expected operation of DDO for typical general insurance policies, including worked examples of how ASIC expects the requirements to work, “We have still not seen this,” said Booth.

“At the end of the day, the obligations on insurance brokers will very much depend on the wording of the Target Market Determinations prepared by insurers.”

NIBA has been calling for a consistent approach to the development of TMD’s in general insurance, in order to ensure all parties are likely to be observing their new obligations, and to avoid unnecessary and inefficient procedures which will add cost but little or no benefit for policyholders.

“The good news is that the main DDO obligations do not apply when personal advice is provided in relation to the product. This does not remove all obligations, however,” explained Booth.

“DDO is going to be a major challenge for broking firms during 2021, and systems and processes will need to be developed to ensure compliance with the new obligations. NIBA will now start to provide detailed information to Member firms to help them implement the new rules.”