The corporate regulator’s draft guidance on product design and distribution obligations could place a significant burden on financial planning groups, argues law firm Hall & Willcox.
The design and distribution obligations (DDO) regime was enacted under the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (DDO & PIP Act), which received royal assent on 5 April 2019. ASIC’s consultation to the guidance closes 11 March 2020, with the regulatory guide expected to be released later this year.
However, according to Harry New, partner in Hall & Wilcox’s financial services practice, while ASIC’s ‘principles-based approach’ will be welcomed by the industry, the indirect effects of the legislation could place significant burden on product issuers, such as fund managers, and distributors including financial planning groups.
“The DDO will increase the level of involvement a product issuer will need to have in their distribution network, and the amount of due diligence an issuer will need to undertake. It will also increase the costs of product manufacture and distribution,” Mr New said.
“One commercial question in relation to the DDO regime is whether such costs will be passed on to consumers.”
According to Mr New, the draft guidance suggests product issuers will need processes to assess a distributor’s capacity to comply with target market determination distribution conditions, which may involve issuers supervising and monitoring distributors to a degree to satisfy their DDO obligations.
“ASIC states that arrangements between issuers and distributors are ‘commercial matters that issuers and distributors can determine among themselves’, but we expect the indirect impact to be significant,” he said.
Further, Mr New said the industry could be satisfied with ASIC’s appropriate regulatory response to the draft DDO guidance, though ASIC has some expectations that go ‘above and beyond the black-letter law’.
“For example, ASIC expects issuers to ‘manage the risk’ of a financial product being widely sold to investors who do not have a diversified portfolio: this is possible if a target market determination states the product is only suited for investors who have or want a diversified portfolio,” Mr New said.
“But it’s not explained how this risk-management does not move the issuer into the realm of giving personal advice.”
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