Refreshing your approach to DDO – do you meet ASIC’s expectations on TMDs?

By Sean McMahon, Jeunesse Meldrum and Taylor Green

ASIC and the Financial Services Council (FSC) have weighed-in on the design and distribution obligations (DDO) with the release of guidance material and a new standard template for target market determinations (TMDs). Partner Sean McMahon, consultant Jeunesse Meldrum, and associate Taylor Green reveal our latest learnings and the steps you should take to satisfy ASIC’s expectations for TMDs and product governance.

Realignment is happening

The financial services industry has been finding its feet since the implementation of DDO in October 2021. The last two months has seen the commencement of a realignment of DDO implementation, with ASIC releasing Report 762 Design and distribution obligations: Investment products (REP 762) and the FSC publishing a revised template TMD.

ASIC DDO Guidance

In the ten months prior to the release of REP 762, ASIC issued 26 stop orders relating to DDO which were accompanied by media releases providing small glimpses into ASIC’s interpretation of DDO. The release of REP 762 on 3 May 2023 was the first official statement of ASIC’s expectations. In this report, ASIC identified some good practices being adopted by issuers as well as areas for improvement.

ASIC noted there is ‘considerable room for improvement’, with the primary focus of the regulator being non-compliant TMDs. ASIC also made observations about the following key areas:

  • Product design, including keeping the consumer in mind, board oversight, stress testing, and engaging with distributors.
  • Appropriateness of the TMD, including defining the target market for risk profile and withdrawal needs, and inclusion of distribution conditions.
  • Distribution and oversight arrangements, including monitoring and supervisory arrangements for third party distributors.
  • Monitoring and review arrangements, including review triggers and conducting reviews.

FSC’s Template TMD

The FSC template refresh was underway prior to the release of REP 762, however its release was opportune with the dropping of REP 762 into the market. Together, these materials have springboarded the investment product sector into an ad-hoc realignment process. Many in the market began to consider their existing infrastructure, with amendments as necessary to satisfy ASIC’s expectations. We are currently running several DDO review projects aimed at comprehensively considering TMDs and/or the practical implementation of DDO.

To assist the industry, the FSC has also taken the lead in developing a new template TMD. We recently attended the FSC’s workshop on ‘Preparing a TMD’ which recapped ASIC’s findings in REP 762 and reflected on the takeaways from the numerous stop orders made by ASIC in respect of DDO over the past year. It also saw the announcement of the FSC’s new template TMD, with an analysis of the changes from the original 2021 version to now. Below is a summary of the key takeaways or changes to the new FSC template TMD.

TMD Key Takeaways

Amber rating – ASIC has advised against using amber ratings with the intent of steering issuers away from ‘sitting on the fence’. This does not necessarily negate the use of amber ratings with appropriate explanation, but the revised template is aimed at including additional granularity to reduce the need to use amber ratings. In our view, an ‘amber’ rating can be appropriate in certain circumstances and in fact can be a conservative approach if using ‘amber’ instead of ‘green’.

Intended product use – Portfolio allocations have been revised to reduce the breadth of existing options. There are now five allocations: up to 10 percent, 10 – 25 percent, 25 – 50 percent, 50 – 75 percent, and 75 – 100 percent.

Access to capital – The FSC has reframed a consumer’s need to ‘withdraw money’ to a consumer’s need to ‘access capital’. This is to better reflect the nature of investment products and to reflect the usual time taken to process and meet redemption requests.

Distribution conditions – It is a requirement to specify your distribution conditions. ASIC has made it very clear it is not appropriate to indicate there are ‘no distribution conditions’. This has always been our position because not having distribution conditions effectively means a product is suitable for all customers. Only a very limited number of products are suitable for all customers.

Do you meet ASIC’s expectations?

If you would like to know exactly how the new standards will impact your TMDs and product governance arrangements, reach out to our specialist Investment Funds team. We are currently undertaking DDO reviews, including assisting clients by conducting fulsome reviews of their implementation of DDO across business groups over the last two years.


Sean McMahon

Sean has more than 25 years’ experience in the funds management and corporate sectors.

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