This article follows a session on the design and distribution obligations (DDO) topic held at the Australian Securities & Investments Commission (ASIC) Annual Forum (AAF), 3-4 November 2022.
The session was moderated by ASIC Executive Director of Strategy Group, Greg Kirk.
Keynote: Professor Lauren E. Willis, Associate Dean for Research, Professor of Law and William M. Rains Fellow, Loyola Law School, Loyola Marymount University, Los Angeles.
- Fiona Smedley, Partner, Herbert Smith Freehills;
- Professor Susan Thorp, Associate Dean Research, Professor of Finance, The University of Sydney Business School;
- Professor Lauren E. Willis, Associate Dean for Research, Professor of Law and William M. Rains, Fellow, Loyola Law School, Loyola Marymount University, Los Angeles.
- This session explored the principles of the DDO, the first year of the DDO and key themes for the DDO going forward.
- DDO shifts the focus of financial services regulation away from a disclosure mindset to a consumer-centric and outcomes-focused approach to designing and distributing products.
- ASIC is working on targeted, risk-based surveillances and enforcement action, including issuing stop orders, and other regulatory action focusing on sectors and products that pose the greatest risks of consumer harm.
The design and distribution obligations (DDO) came into effect on 5 October 2021. These laws shift the focus of financial services regulation away from a disclosure mindset to a consumer-centric and outcomes-focused approach to designing and distributing products. They require industry to implement effective and robust product governance arrangements across the life cycle of financial products. This is to ensure that consumers receive products that are likely to be consistent with their objectives, financial situation and needs.
Insights from the session
The panel reflected on the first year of the DDO and discussed a range of themes. For example, they noted that organisations must have robust and effective product governance arrangements in place to operationalise their TMDs, and to comply with other aspects of the DDO, such as the distribution and review requirements.
Professor Lauren E. Willis, Associate Dean for Research at Loyola Law School in California said, ‘What we really need is consumer financial protection that will align firm incentives with consumer welfare, shift responsibility for achieving regulatory goals onto firms that are designing, selling and marketing products to consumers day in and day out, and place actual consumers at the centre of product design and distribution. The design and distribution obligations have the potential to involve all of those things.’
The concept of target market in DDO has raised some challenges, according to Fiona Smedley, Partner at Herbert Smith Freehills.
‘What DDO has done is essentially lifted the game of everyone in the industry and created a uniform requirement in relation to assessing and really understanding your target market,’ Ms Smedley said.
It is expected that, in future, the DDO will generate a wealth of data for issuers and distributors and ensure a more data and outcomes-informed approach to the review and enhancement of TMDs and products.
‘The data needs to go a lot further than measuring complaints,’ Lynwen Connick, Chief Information Security Officer, ANZ Bank said, ‘We want to understand when a product is being used for a purpose other than which it was intended, and the question of which consumers are using it.’
ASIC’s focus on DDO
ASIC is working on targeted, risk-based surveillances and enforcement action, including issuing stop orders, and taking other regulatory action to address poor design and distribution of products. We are focusing on sectors and products that pose the greatest risks of consumer harm, applying a DDO lens when responding to poor consumer outcomes that we identify.
Where firms are not doing the right thing, ASIC will take quick action under DDO to disrupt poor conduct and prevent potential consumer harm. For example, ASIC has issued a number of DDO interim stop orders in relation to deficient target market determinations for high-risk investments. These actions signal the need for industry to ensure that they have a robust approach to compliance with DDO.
To date, ASIC has issued eleven DDO interim stop orders and six remain in place. Five interim stop orders have been lifted following actions taken by the entities to address ASIC’s concerns.
ASIC’s Executive Director Greg Kirk said, ‘One year on, a big focus for industry has been to get the TMDs in place. I think the power of this regime is not just the initial cultural shift, but that it will be an iterative process. You have to monitor the outcomes, find out what is going well or going badly and then you can do something about that. I think the standard, over all, will go up over time.’
ASIC is Australia’s corporate, markets and financial services regulator.
Source: © Australian Securities & Investments Commission. Reproduced with permission.
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