Since its introduction, this regime has reshaped how product issuers design, market and distribute financial products in Australia. Established under the Corporations Act 2001 (Cth), DDO aims to ensure consumers receive products that align with their financial objectives and circumstances.

Over the past few years, updates to the regime have influenced how Australian Financial Services License (AFSL) and Australian Credit License (ACL) holders approach product development and risk management compliance. As the Australian Securities and Investments Commission (ASIC) continues refining these obligations, businesses must stay ahead of emerging changes. ASIC has already had its first success in civil proceedings, resulting in an $8 million fine for failures on Design and Distribution Obligations (DDO). 

Here, we explore the evolution of DDO, key updates since its introduction and what to expect in the future — helping financial service providers navigate compliance while keeping consumer interests front and centre.

What You Need To Know About DDO

Design and Distribution Obligations require firms to design and distribute products to clearly articulate who the target consumer is and ensure their products meet those needs. Rather than focusing on prescriptive rules, outcomes-based regulation sets high-level results standards.

Regulators have determined that disclosure alone is inadequate for ensuring positive consumer outcomes, as it fails to balance financial products with consumers’ capacity to manage them. Introducing DDO is a supply-side intervention that places the responsibility of consumer outcomes on issuers and distributors. Key points include: 

Monitoring 

Issuers and distributors must actively monitor how products are sold and used. This includes assessing whether the product remains suitable for the intended target market and identifying any circumstances that could lead to poor consumer outcomes.

Distribution

Financial products must only be marketed and sold to consumers within the target market determination (TMD). Distributors are required to take reasonable steps to ensure products reach the right consumers and report any discrepancies or risks directly to issuers.

Reporting Obligations

Issuers must notify ASIC of significant dealings in a product that does not align with the product’s target market determination. Neither dealings nor notification necessarily constitutes a breach of law; both just signal that further investigation might be in order. 

Target Market Determination (TMD)

Issuers must define a clear TMD for each financial product, outlining who the product is designed for and the conditions under which it should be sold. The TMD should be reviewed regularly to ensure it remains appropriate — especially if consumer behaviour or market conditions change.

The introduction of the DDO regime under RG 274 Product design and distribution obligations has significantly enhanced ASIC’s regulatory authority, allowing it to issue stop orders to ensure compliance. RG 274 requires issuers and distributors to carefully assess and document the target market for each financial product. Since its implementation, ASIC has issued over 80 preliminary stop orders, aiming to improve enforcement standards around target market identification and product distribution.

DDO Updates and Amendments

Since 1 July 2022, ASIC placed interim stop orders on 26 investment products from 18 issuers. This represented $6.6 billion in retail investment funds. To address DDO issues, 12 issuers amended 18 TMDs and five issuers withdrew seven total products. In May 2023, ASIC released a report investigating DDO progress. ASIC’s report didn’t necessarily change DDOs, but it did instil a new sense of urgency in many license holders. 

Between October 2023 and August 2024, ASIC further monitored 19 issuers of high-risk investment, insurance and credit products. It reported findings in Report 795 Design and Distribution Obligations: Compliance with the reasonable steps obligation (REP 795).

ASIC Commissioner Alan Kirkland acknowledged issuers’ progress and stated that improvements were still necessary to reinforce consumer confidence that financial products meet their needs.

According to Rep 795, ASIC revealed:

  • Many issuers had limited due diligence arrangements to assess and monitor third-party distributors.
  • Some issuers of high-risk products relied on broad search terms in online marketing.
  • Many issuers used poor-quality consumer questionnaires.
  • Only a few issuers monitored consumer outcomes and product performance.

If you’re an AFSL or ACL holder, here’s what you need to consider moving forward:

  • Stringent enforcement: ASIC is ramping up enforcement, with increased scrutiny and penalties for non-compliance. Expect more stop orders and legal action, especially for issuers failing to monitor product performance or consumer outcomes effectively. 
  • Data analytics and AI: ASIC’s findings show issuers are not appropriately monitoring consumer outcomes, questionnaires or distributor practices. Data capture and analysis — including AI-driven tools — will be instrumental in real-time compliance monitoring.
  • Consumer-centric approach: TMDs must evolve with changing circumstances. Monitoring, consumer feedback loops and proactive adjustments should be part of a firm’s compliance framework.
  • Financial market changes: Product governance must consider market shifts, like inflation, interest rates and investor behaviour.

Making DDO Manageable: Challenges and Solutions

While there’s much to review when it comes to complete DDO compliance, ASIC has flagged poorly defined target markets as a major issue. Product issuers must ensure target audiences are well-defined and accurately reached. For instance, this may mean using more specific marketing search terms and strengthening consumer questionnaires to capture financially suitable audiences. If a product extends past your intended consumers, review your TMD immediately to identify possible flaws or uncertainties.

It’s also wise to think about the product itself: Is its design fit for purpose? Keep in mind that products should always be aligned with consumer needs. Review details such as:

  • Risk appetite.
  • Features.
  • Complexity.
  • Purpose.
  • Likely investment audience.

For example, a product that only generates revenue for the issuer and has no positive outcome for investors is likely neither appropriate nor compliant.

Distributors also need to stay vigilant around product complaints. Analyse feedback and identify the root cause, which requires a cross-departmental understanding of the target market. This helps organisations comply with ASIC’s expectations to regularly assess product performance and suitability, identify issues and take prompt corrective action.

How To Get Ahead

ASIC’s interim stop orders can significantly impact a licensee’s reputation, cash flow and productivity. There are only two ways to have these orders lifted: Either make necessary changes or withdraw the product entirely.

To avoid these problems, our experts recommend that you:

  • Get started early: Proactively review TMDs and implement real-time monitoring of consumer behaviour and complaints.
  • Link in and do once: Integrate DDO requirements with existing risk and compliance frameworks.
  • Communicate diligently: Issuers must communicate with distributors regularly. This helps share the information required to meet key obligations.
  • Leverage data capture: When complaints arise, distributors should send feedback to issuers to help identify product performance or TMD issues. As such, distributors must be able to capture and report on critical data.
  • Align stakeholders: Define clear roles for product design, risk management and compliance, and establish accountability structures so each department understands its role.
  • Demonstrate compliance: Licensees must keep well-documented and auditable records, including TMD activities and other DDO compliance tasks. 
  • Practice consistent vigilance: No matter what role you play in the industry, stay updated on ASIC’s regulatory guidance. Follow media releases, use data management platforms and follow up with legal and compliance teams to ensure continued DDO alignment. This includes tracking consumer behaviour, adjusting marketing strategies and refining TMD criteria.

Stay DDO Compliant

Since the DDO took effect in 2021, ASIC has commenced five civil proceedings, with three successful outcomes and over 80 stop orders issued. ASIC is taking firms to court for issues such as: 

  • Insufficient due diligence measures in assessing and monitoring third-party distributors.
  • High-risk products that rely on broad search terms in online marketing efforts.
  • Poor-quality consumer questionnaires.
  • Sending product disclosure statements to term deposit holders without first taking reasonable steps to confirm a product’s consistency with its TMD.

For many AFSL and ACL holders, the best way to protect themselves and their consumers is to master risk and regulatory change management. A platform like RegsWeb can help identify compliance gaps in your internal files — the kinds that lead to broad TMDs, unsuitable risk profiles and potential ASIC action. You’ll also have access to a library of external regulatory content,  including all relevant ASIC regulatory guides, the Corporations Act and associated regulations.  RegsWeb then allows you to visualise connections between the regulations,  guidelines and your own policies, keeping you on top of changes to regulations when they happen.

On top of all that, you can also turn to MIntegrity for compliance guidance and advice. Our industry experts know how to navigate regulatory change and what you can expect around every corner.

Contact us today to make compliance more manageable.

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