ASIC releases design and distribution guidance

ASIC’s ‘Regulatory Guide 274: Product design and distribution obligations’, released on Friday, outlines a swathe of new obligations that will apply to issuers of financial products and their distributors – including licensees – and follows extensive industry consultation.

“Engagement with industry was particularly important as the obligations require firms to set their own boundaries to suit their business, products and customers,” ASIC acting chair Karen Chester said.

“If they stay within these boundaries this will mean less enforcement action from ASIC and the opportunity for deregulatory initiatives over time.”

The new rules will take effect from 5 October 2021, in what ASIC is calling a “game changer” in obligating firms to properly target their products to appropriate groups of consumers.

Before they are able to release a financial product on the market, issuers must develop a target market determination that sets out who the product is targeted towards, how often they will review the determination and how they will collect information from distributors about consumers’ response to the product.

The determination must also meet “appropriateness requirements” such that it would be reasonable to assume if it was distributed to the specified consumer group, it would meet their needs and objectives.

Additionally, it must set out “review triggers” that would require the issuer to review the conditions of the target market determination, and if such events occur, the issuer must review the determination within 10 business days.

The new obligations also come with additional requirements for licensees, who must not distribute a retail product if it does not have a target market determination, and must take “reasonable steps” to ensure the distribution conditions set out in the determination are being met.

Distributors must also notify a product issuer within 10 business days if they become aware of a situation where the distribution conditions attached to a product are not being met.

Further, licensees must keep “complete and accurate records” of complaints associated with a product.

When ASIC has concerns that the distribution obligations attached to a product are not being met, it can issue a “stop order” to prevent further distribution of the product.

“In conjunction with using our stop order power, we may consider taking enforcement action for a breach of the design and distribution obligations,” the regulator stated.

Consumers also have legal recourse to recover any losses they believe they have incurred due to a breach of a product’s distribution obligations.