Revised draft Design and Distribution Obligations regulations

In this article, we outline briefly the exposure draft regulations released by the Government which support the new design and distribution obligations under the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Cth) (DDO & PIP Act). The DDO & PIP Act amends the Corporations Act 2001 (Cth) (Corporations Act) to introduce design and distribution obligations (DDO) in relation to financial products. The DDO & PIP also amends the Corporations Act and the National Consumer Credit Protection Act 2009 (Cth) to introduce a product intervention power for ASIC to prevent or respond to significant consumer detriment.

Key points

• The proposed regulations modify the DDO & PIP Act by extending the DDO regime by altering the products and persons in relation to which the DDO regime applies. The amendments:
  • extend the DDO to additional persons;
  • extend the DDO to additional products; and
  • exclude certain products from the DDO.
• Compared to the previous draft regulations released in 2018, this exposure draft takes into account the inclusion of credit products under the DDO & PIP Act and provides for further exclusions.
• These proposed regulations are intended to come into effect on 5 April 2021 in conjunction with the DDO regime itself.

Overview

From 5 April 2021, certain product issuers and product distributors will need to comply with the design and distribution obligations imposed by the DDO & PIP Act. Broadly speaking, the DDO require product issuers and distributors to design, market and distribute financial products and credit products that meet investors’ needs. Through target market determinations, issuers must identify, in advance, the investors for whom their products are appropriate and direct distribution to that target market. We summarised the enacted legislation in our earlier article.

On 12 September 2019, the Treasury released for public consultation exposure draft regulations to support the DDO regime under the DDO & PIP Act and will receive comments on the draft regulations up until 11 October 2019. These draft regulations (the Corporations Amendment (Design and Distribution Obligations) Regulations 2019 (Cth)) (Draft Regulations) are intended to come into effect with the DDO regime, on 5 April 2021.

Under the DDO & PIP Act, the DDO regime applies to certain financial products and credit products that are issued and distributed to retail clients. The Draft Regulations enhance the DDO regime by altering the products and persons in relation to which the DDO regimes applies.

Outline of the Draft Regulations

The Draft Regulations’ modifications to the DDO regime are summarised in this table.

Products and persons to which the DDO regime is extended

Products and persons excluded from the DDO regime

Products Simple corporate bonds depository interest, where the bonds are to be issued under a two part simple corporate bonds prospectus Debentures of an ADI or a life company, excluding wholesale issuances Basic banking products Rights of a retail client in connection with an IDPS Financial products that include a custodial or depository service provided to a retail client Products that are the subject of sales amounting to indirect issue and sales amounting to off-market sales by controller Persons Sales amounting to indirect issue and sales amounting to off-market sales by controller Issuers of extended operation financial products and sellers of extended operation financial products under a regulated sale.  The term ‘extended operation financial products’ means financial products defined under the Corporations Act and the Australian Securities and Investments Commission Act 2001 (Cth) A product distributor within the meaning of section 910A of the Corporations Act (as modified by the ASIC Corporations (Basic Deposit and General Insurance Product Distribution) Instrument 2015/682) in relation to basic deposit products, general insurance products, and bundled consumer credit insurance products Credit licensees and credit representatives within the meaning of the National Consumer Credit Protection Act 2009 (Cth), certain persons who are exempt from the requirement to hold a credit licence, persons who engage in credit activities on their own behalf, and persons who contravene the prohibition on engaging in credit activities without a licence

Interests eligible rollover funds Defined benefit interests in superannuation funds Medical indemnity insurance products Depository interests in fully paid ordinary shares in a foreign company Bank drafts Money orders issued as a money order by, or for, Australia post Credit facilities not issued in the course of a business of providing credit Credit facilities provided for business purposes Certain ‘credit facilities’ that do not involve the provision of credit Credit provided by pawnbrokers Credit facilities that are the provision of a mortgage that secures obligations under a credit contract (but not the credit contract) extended operation financial products, if the offer to issue or sell the product is not received in this jurisdiction.

Amendments since the draft regulations released in October 2018

In October last year, the Government released an exposure draft of the Corporations Amendment (Design and Distribution Obligations and Product Intervention Powers) Regulations 2018 (Cth) for public consultation. The Draft Regulations incorporate the regulations in relation to the DDO regime in the 2018 exposure draft with some modifications.

The modifications in the Draft Regulations take into account the inclusion of credit products under the DDO & PIP Act but go further by excluding further products and persons from the DDO regime (the previous draft regulations excluded only eligible rollover funds, defined benefit interests, medical indemnity insurance, and depository interests in foreign fully paid ordinary shares).

Policy rationale

Under the DDO & PIP Act, the DDO did not apply to certain products that were exempted from disclosure obligations to retail clients under the Corporations Act. For instance, certain IDPS operators are exempt from disclosure obligations due to ASIC Class Order [CO 13/763]. According to the draft Explanatory Statement to the Draft Regulations, these regulations ensure that products will not fall outside the DDO regime simply because they are exempt from disclosure. As a result of the Draft Regulations, IDPS platform operators and arrangements where a provider manages a client’s portfolio of assets on behalf of a retail client on an individual basis at the provider’s discretion.

In addition, the draft Explanatory Statement states there are varying reasons why certain products and persons are excluded from the DDO regime. For example, eligible rollover funds are excluded because the purpose of these funds is to temporarily hold the super balances of lost or ineligible members pending the member transferring the funds elsewhere, so the consumer protection rationale does not apply. On the other hand, medical indemnity insurance products and pawnbroking are excluded because they are already subject to other regulatory regimes.

Next steps

ASIC states that is currently developing guidance on its expectations regarding the DDO regime, and we should see a draft consultation paper from ASIC before the end of this year.

We consider, however, that product issuers and distributors should take action now to make sure they are ready for the new regime which commences on 5 April 2021. This work includes identifying products that are the subject of DDO, identifying distributors, identifying the classes of target investors for each product, drafting and testing target market determinations, and developing distribution arrangements with distributors. We would be pleased to assist you with developing your plans to deal with your design and distribution obligations.