Financial institutions are starting to realise the full significance of the change to financial product regulation that will come under ASIC’s new power, the design and distribution obligation, say lawyers working with companies preparing for the new regime.
As the October 5 start date for DDO approaches, financial services companies are grappling with questions about what sorts of relationships or agreements they should have with third party distributors, and whether they should vet their distributors.
In a note to clients, Hall & Willcox lawyers Vince Battaglia and Nina Mao, outlined the types of questions their clients have raised with them as they prepare for DDO.
Clients are asking whether they have to review their current distribution arrangements and what their obligations are in relation to “continuing products” – existing products that continue to be issued after October 5.
Under DDO, financial services companies will be required to identify the target market for their product and will need to design the product for that market. They will have to select appropriate distribution channels and periodically review those arrangements to ensure they continue to be appropriate.
The scheme is aimed at reducing the harm of mis-selling.
A “target market determination” must describe the class of retail clients that comprise the target market for the product, specify any conditions or restrictions on sale, specify events and circumstances that would suggest that the determination is no longer appropriate, and specify review periods.
A product cannot be distributed until a target market determination has been made. Distributors of financial products will be required to take reasonable steps to ensure that products are distributed in accordance with the identified target markets.
The law gives ASIC power to enforce the new arrangements, including stop orders and exemption powers.
An extensive list of banking products will be covered. The meaning of a financial product for DDO purposes includes any product that requires a product disclosure statement; securities for which a disclosure document must be prepared, such as hybrids; credit contracts regulated under the National Consumer Credit Protection Act, including credit cards and home loans; short-term credit contracts not covered by the NCCP Act; debentures; depository interests in simple corporate bonds; basic banking products as defined in the Corporations Act; exchange traded products and investor directed portfolio services; and certain custodial arrangements.
Battaglia and Mao said: “We understand from speaking with our clients that many product issuers do not have full visibility over the distribution of their products by financial advisers, in particular unaligned advisers with whom the issuers have no contractual or other relationship.
“ASIC’s guidance suggests that issuers may need to undertake some kind of vetting process or formalise relationships.
“Whether there is a need to formalise distribution relationships into a distribution agreement between issuers and distributors is one of the key implementation questions facing the industry.
“As issuers are required to take reasonable steps so that distribution is consistent with the target market determination and third party distributors are required to report to issuers, the communication between the parties will in any event form a pattern of agreed behaviour.”
Battaglia