On 19 December 2019, ASIC released Consultation Paper 325 (CP 325) seeking feedback on its proposed guidance on DDO. CP 325 attaches Draft Regulatory Guide 000 Product design and distribution obligations (Draft RG) which provides guidance on ASIC's interpretation of DDO, its expectations of issuers and distributors, and its approach to administering this regime. ASIC expects to finalise its regulatory guidance on DDO in 2020.
The proposed guidance is intentionally high-level and principles-based given the breadth and scalability of DDO, and includes practical examples to supplement this approach.
The key messages from ASIC's proposed guidance are:
- An appropriate target market should be identified at the outset and ensure it is the focus of product development, design and distribution; and
- Issuers and distributors should maintain effective governance processes across the lifecycle of financial products to ensure consumer needs are met.
What you need to do
- Familiarise yourself with the ASIC guidance within the draft regulatory guide and consultation paper;
- Review business and compliance practices to ensure you have appropriate product governance processes and controls in place to comply with the DDO; and
- Make any submissions to ASIC in respect of its consultation before 11 March 2020 if you wish to contribute your feedback.
An overview of ASIC's expectation of issuers and distributors
To comply with DDO, ASIC expects that:
a) Issuers have a robust product governance framework which consist of systems, processes, procedures and arrangements that:
- focus on the identified target market across the lifecycle of the financial product;
- is designed to reduce the risk of products being sold to consumers that are not consistent with their likely objectives, financial situation and needs; and
- is documented, fully implemented, monitored and reported on, and regularly reviewed to ensure that it is up to date.
b) Issuers and distributors consider consumer vulnerabilities and how these vulnerabilities may increase the risk that products sold to consumers do not meet their needs and lead to poor consumer outcomes. Issuers and distributors should not take advantage of behavioural biases or factors that can impede consumer outcomes.
c) While target market determinations will differ based on what is appropriate for each issuer, issuers should:
- for new products: design financial products that are consistent with the needs of consumers in the select target market;
- for continuing products: critically assess their product and processes to ensure both DDO and legislative requirements respectively, are met for the intended consumer;
- take reasonable steps to manage the risk of their product being sold to consumers who do not have a diversified portfolio when their target market also includes consumers who may acquire the financial product as part of a diversified portfolio;
- should not predominantly base the target market on consumer understanding of a product;
- in making a target market determination: consider the 'negative target market' ie those consumers that would be clearly unsuited to the financial product; and
- in reviewing a target market determination: take into account all available information on its financial product.
d) An issuer should consider the following to determine if there has been significant dealing in a financial product inconsistent with the target market determination:
- proportion of customers not in the target market that are acquiring the financial product;
- actual or potential harm to consumers; and
- nature and extent of inconsistency of distribution with the target market determination.
e) Specifically, insurers should take reasonable steps to ensure the renewal process results in outcomes that are consistent with the target market determination:
- at the time of renewal: analyse the information it holds on the consumer and consider a number of factors including, whether a class of consumers is no longer in the target market.
- following assessment: if a consumer is no longer in the target market for a policy, the insurer should not decline to offer a policy renewal without contacting the consumer first.
f) Distributors should:
- in forming a reasonable view on whether a consumer is reasonably likely to be in a target market:
- have sufficient information gathered as part of their responsible lending obligations and through existing sales processes; and
- embed processes to assist in the assessment including, 'knock-out questions' in the application process, data analysis and direct questions to consumers;
- take steps to reduce the likelihood of a consumer believing that their personal circumstances have been considered, including by not having a relevant provider involved to ask specific questions and only asking specific questions once the consumer has decided to acquire the product;
- when selling a financial product to consumers outside the target market, take reasonable steps proportionate to the circumstances, nature and degree of the harm, and the steps that can be taken to mitigate the harm; and
- note, that the reasonable steps obligation does not require further steps when assessing, for responsible lending purposes, whether the consumer can comply with their contracted financial obligations.
g) A target market determination for a financial product should be considered by a financial adviser in providing the advice and meeting their best interests duty.
ASIC expects that as the DDO regime matures, the approach taken by issuers and distributors will naturally evolve over time as systems and processes are developed, tested and refined.
What ASIC proposes to provide guidance on
In addition to providing guidance on the expectations above, ASIC proposes to provide further guidance on:
a) how the target market determination applies in scenarios where the obligation is not straightforward;
b) the reasonable steps obligations for issuers, distributors and insurers, including what relevant factors to consider; and
c) the issuer's obligation to specify in the target market determination, the following:
- any necessary information required from distributors to decide if a target market determination is no longer appropriate; and
- the distributor's reporting period for complaints.
ASIC does not propose to provide guidance on:
a) any definitive formulation of how a target market should be described in a target market determination, but will provide guidance that explains the process and key considerations;
b) standard review triggers and maximum review periods issuers should adopt, but will provide examples on what is appropriate for certain types of financial products;
c) practical aspects of the issuer / distributor relationship regarding information exchange.
ASIC is of the view that its guidance will be a useful starting point for a new approach to prepare for commencement of this regime, and expects that its guidance will evolve with the benefit of time and experience.
How will ASIC administer DDO
Any exemptions or modifications granted to the DDO will be assessed by ASIC on a number of factors including, whether the objects of Chapter 7 of the Corporations Act are being promoted and the policy and parliamentary intent underlying DDO.
ASIC has also made clear that relief requests will be considered as separate matters and that if ASIC grants disclosure relief for a financial product, relief from the DDO will not automatically follow.
Authors: Jonathan Gordon, Corey McHattan, Silvana Wood
