DDO: are you taking ‘reasonable steps’?
ASIC and the Federal Court have been busy interpreting what issuers and distributors of financial products to retail clients need to do to comply with the reasonable steps obligation.
In September, ASIC issued a media release calling on product issuers to ensure distribution practices are up to scratch, pointing to flawed consumer questionnaires being the catalyst for some recent interim stop orders. On the same day, ASIC published Report 795 Design and distribution obligations: Compliance with the reasonable steps obligation (Report 795) and released minor updates to RG 274 Product design and distribution obligations (RG 274) to provide greater clarity around the appropriateness requirement for target market determinations (TMDs). ASIC says the changes to RG 274 will not require product issuers to update their TMDs.
Report 795 highlights improvements ASIC considers issuers and distributors of retail products should make to internal policies and procedures to comply with the ‘reasonable steps’ obligation. The report is the outcome of ASIC’s review of 19 issuers of a variety of ‘high risk’ financial products with narrow target markets, including six issuers of registered managed investment schemes.
The key issues ASIC raises in the report are that issuers and distributors seem to:
- have limited due diligence arrangements in place to assess a distributor’s ability to distribute products in accordance with the TMD;
- use broad search terms in online marketing for high-risk products;
- use poor-quality questionnaires that do not seek to understand a consumer’s attributes and have poor design features such as prompts with ‘correct’ responses; and
- have inadequate systems in place to monitor consumer outcomes to inform product governance arrangements and future distribution practices.
In our view, it would be prudent for fund managers to consider whether their DDO policies and procedures adequately address the following:
- Distributors. Are there systems to conduct due diligence on distributors and then monitor, review and assess distributor performance and conduct at least annually?
- Training. Do DDO training programs go further than general training on a product and its features and cover the connection between features and the target market and enable staff to apply this knowledge when engaging with consumers?
- Marketing. Do advertising procedures and checklists consider the TMD and DDO requirements generally, including an assessment of the target audience of the campaign to ensure it aligns with the TMD of the product and a written explanation of why the relevant marketing channels were chosen, taking into account the target audience and TMD?
- Questionnaires. Do filtering questions comply with ASIC’s view of questionnaire design principles?
- Use of information and monitoring outcomes. Do complaints reporting and other investor feedback processes capture information relevant to DDO, for example about how products are performing and consumer outcomes having regard to target markets?
The HW Funds team is watching this space and working with clients to implement ASIC’s ‘better practice’ recommendations from Report 795. Please reach out to us if we can assist you to navigate this latest added complexity around DDO. We can assist you to:
- review and update your DDO policy and DDO product work plans.
- design and deliver DDO training programs.
- prepare scripts for consumer-facing staff.
- prepare an advertising and promotion review checklist, and review advertising and marketing campaigns.
- draft filtering questions in light of ASIC’s view of questionnaire design principles.
- prepare bespoke internal policies and procedures, for example a DDO working group agenda and workflow template and platform due diligence checklist etc.
