ASIC design and distribution obligations: Ensuring your TMD is compliant

In October 2021, the Australian Securities and Investments Commission (ASIC) put new product design and distribution obligations (DDOs) into effect. In May 2023, after 18 months of enforcement, ASIC released a report investigating progress in these areas.

Karen Chester, ASIC Deputy Chair, summarised the findings: ‘It is disappointing to see DDO deficiencies across the board by large and small product issuers alike. […] Product issuers need to lift their game — and now.’

Here’s a closer look at DDO and what this means for Australian Financial Service License (AFSL) and Australian Credit License (ACL) holders.

What is outcomes-based regulation?

ASIC has built DDO around outcomes-based regulation, which means that products must be designed and distributed with clear, contemporary consideration of consumer objectives. That means taking into account retail investors’ financial situation and needs.

Additionally, products must target the correct audience and avoid attracting investors for whom certain investment features may not be appropriate. This is part of target market determination (TMD), a critical element in DDO compliance. For example, if a certain group of retail investors isn’t being targeted but is using a product, both distributors and issuers must review the TMD.

It’s important to note that ASIC has reported significant deficiencies in TMDs across the financial services industry. The organisation urges licensees to improve key practices — not just to protect consumers and remain compliant, but also to ensure that TMDs are fit for purpose and reaching intended audiences.

What’s changing?

ASIC’s recent report hasn’t necessarily changed DDOs, but it has instilled a new sense of urgency in many license holders — and for good reason.

Since 1 July 2022, ASIC placed interim stop orders on 26 investment products from 18 issuers. This represents $6.6 billion in retail investment funds. To address DDO issues, 12 issuers amended 18 TMDs and five issuers withdrew seven total products.

According to ASIC, most DDO noncompliance incidents fell into several categories:

Target markets defined too broadly.
Unsuitable investor risk profiles.
Unsuitable levels of portfolio allocation.
Unsuitable investment timeframes and/or withdrawal features.
Inappropriate or no distribution conditions.
TMD templates used without appropriate customisation.

What does this mean for licensees?

While there’s much to review when it comes to complete DDO compliance, most licensees need to consider a few key areas.

First, it’s vital to ensure that your target audience is well-defined and accurately reached. 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.
Who’s likely to invest in the next 12 months.

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 be keenly aware of product complaints. It’s important to 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 any issues and take prompt corrective action.

Next steps for AFSL and ACL holders

ASIC’s interim stop orders can have a significant impact on 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:

Careful communication: Issuers must communicate with distributors on a regular basis. This helps share the information required to meet key obligations.
Effective data capture: When complaints do arise, distributors should send feedback to issuers to help identify product or TMD issues. As such, distributors must be able to capture and report on critical data.

Compliance demonstration: Licensees are expected to keep proper records of their compliance activities, including TMD and other DDO compliance tasks.

Consistent vigilance: No matter what role you play in the industry, you should stay updated on ASIC’s regulatory guidance. Follow media releases, use data management platforms and follow up with legal and compliance teams.

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 policy documentation and visual connections between those guidelines and your own policies.

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, the most significant pitfalls and what you should expect around every corner.

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