New Design and Distribution Obligations for Financial Products

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On 21 December 2017, the Government began consultation on the exposure draft of a new law (the draft Bill) which will require most businesses that issue financial products to follow new rules in designing and distributing those products. The goal of these changes is to support consumers in choosing the financial products that are most appropriate for them.

In today’s article, part one of two, we look at the new design and distribution obligations while in the next article we will look at the proposed Australian Securities & Investments Commission (ASIC) intervention powers also contained in the draft Bill.

design obligations
Photo by Ramiro Mendes on Unsplash
By Dr Drew Donnelly, Compliance Quarter.

Background

The Financial System Inquiry (FSI) found that the existing regulatory framework for financial products relied significantly on disclosure. However, the FSI also found that this was not an entirely effective way to protect consumers. For example, the complexity of disclosure documents and the behavioural biases of consumers can mean that they make unwise choices, despite disclosure.

The FSI recommended the introduction of explicit design and distribution obligations for issuers and distributors of financial products in order to enhance consumer protection. In response to these FSI recommendations, the draft Bill was developed by the Government to introduce these obligations through amending the Corporations Act 2001.

Who will the obligations apply to?

The draft Bill provides that the obligations will generally apply to offers of financial products that already require disclosure under the Corporations Act 2001 (including those required to produce a product disclosure statement), or which are exempt from such disclosure under a mutual recognition scheme. Note, however, that some products requiring disclosure are exempt from the new regime including MySuper products, margin lending facilities, securities to which an employee share scheme applies and ordinary shares.

The draft Bill also allows for the Government to apply the obligations to additional financial products or provide additional exemptions through Regulations.

What are the design obligations?

The draft Bill creates four design obligations and five distribution obligations for financial product issuers and distributors.

The design obligations are:

  • to make a ‘target market determination’ for that financial product. This document sets out, in writing, the target market of consumers for the product and any distribution conditions;
  • review of the target market determination as required to ensure it remains appropriate;
  • keeping records of decisions in relation to the new obligations; and
  • notifying ASIC of any significant dealings in a product that are not consistent with the product’s target market determination.

The distribution obligations are:

  • not to deal, or provide financial product advice, for a product except where a target market determination has been made;
  • not to deal, or provide financial product advice, where the target market determination may no longer be appropriate
  • to take reasonable steps ensuring that products are distributed in accordance with the target market determination.
  • collecting information related to the distribution of a product; and
  • notifying the issuer of a product of any significant dealings in the product that are not consistent with the target market determination for that product.

The draft Bill also amends existing section 1018A of the Corporations Act so that advertising or other promotional material for a financial product will need to refer to the product’s target market.

The draft Bill also provides ASIC with investigation and enforcement powers in relation to the new obligations including an information-gathering power and a power to issue ‘stop orders’ for breach. Relatedly there are a range of civil and criminal penalties provided in the draft Bill for breach of the new obligations.

To read more go to https://treasury.gov.au/consultation/c2017-t247556. If you wish to make a submission on the draft Bill, you can do so before 9 February 2018.

If you’d like to chat with the team at Compliance Quarter you can get in touch with us here.

 

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