Thinking | 17 September 2019
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.
- 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.
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
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).
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.
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.
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