The Design and Distribution Obligations (DDO) regime under the Corporations Act commences on 5 October 2021
The impact of the DDO regime
The DDO regime will require a new way of manufacturing and distributing financial products. DDO affects not just product issuers, but product distributors.
To meet the Design and Distribution Obligations:
- product issuers must design financial products that are likely to be consistent with the likely objectives, financial situation and needs of the consumers for whom they are intended (the target market); and
- product distributors must take ‘reasonable steps’ to distribute financial products to the target market.
Although the detailed Design and Distribution Obligations are complex (and how they work in practice will depend on the exact product), product issuers will need to design and implement product governance arrangements applicable to DDO that covers the following three phases:
What you have to do: our key tips
Here are eight practical things product issuers must do well before the DDO regime commences.
Identify your retail products. For example, this may not be immediately evident where one fund has multiple offering documents or multiple investment options and some are offered to wholesale clients only.
Identify your distributors. You need to identify who distributes your products, as they will have distribution obligations. This may include financial advisers, platforms, authorised representatives with dealing authorisations or asset managers offering PDSs on their website.
Identify whether you’re a distributor as well. The ‘distribution obligations’ will apply to product issuers who distribute their products directly, for example, via their own website.
Develop product governance arrangements. This framework will need to set out a methodology for product managers to design products, identify target markets (and negative target markets), conduct consumer testing, establish distribution criteria and restrictions, identify review triggers and information collection methods, and develop a draft TMD. This framework should also set out the board approval processes, board delegations, record-keeping processes, and procedures for notifying ASIC of significant dealings. This framework may require amendments to a number of existing policies and processes.
Develop a TMD for each product. Along with a PDS, each retail product must have its own TMD. The manner in which it will be publicly available must also be determined.
Developing a ‘reasonable steps’ plan. You need to determine the ways that you will ensure that your products are distributed only to the target market.
Amend distribution agreements. Existing distribution agreements may need to be amended to address, and new distribution agreements will need to address, the obligations of distributors regarding their distribution obligations, as well as obligations regarding record-keeping. Practically, you will need to deal with matters such as sharing consumer and product information, dealing with privacy concerns, and implementing new monitoring and termination provisions.
Review IT arrangements. Your IT systems will not only need to be able to collate, store, process and report on the new data, but they may need to be modified or augmented so that they are in sync with systems used by your distributors.
How we can help you
As you can see, there is a lot to do to prepare for the new DDO regime. We can help you prepare for it by:
- advising you on your legal obligations, whether as a product designer or product distributor or both;
- drafting or reviewing your policies and governance framework;
- designing DDO checklists and implementation plans;
- drafting or reviewing your distribution agreements;
- providing legal sign-off on documentation, such as your TMDs, as well as PDSs and marketing material that may need to be updated as you prepare your TMDs; and
- conducting legal, regulatory and compliance training.
We are presently working with industry groups to prepare for the DDO regime.
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