Revised draft Design and Distribution Obligations regulations

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.