ASIC has released a report on its most recent review of current compliance with Design and Distribution Obligations (DDO)
In brief
Last month ASIC announced that it is calling upon product issuers to ensure distribution practices are ‘up to scratch’. This announcement follows the release of Report 795 Design and distribution obligations: Compliance with the reasonable steps obligation (“REP 795“) by ASIC. Alan Kirkland, ASIC Commissioner, has said that improvements across the board are still required to ensure that consumers feel confident that the financial products they purchase will suit their needs. REP 795 provides guidance to product issuers on how their distribution practices can better comply with the reasonable steps obligations.
Background
A product issuer is obliged under s 994E of the Corporations Act 2001 (Cth) (“Corporations Act“) to take reasonable steps that would have resulted in, or would have been reasonably likely to have resulted in, the distribution of its product being consistent with the target market determination (TMD) for the product (“Reasonable Steps Obligation“). REP 795 is a result of ASIC’s reviewed compliance of the Reasonable Steps Obligation by 19 issuers. It follows ASIC’s issue of four interim stop orders for concerns about compliance with the Reasonable Steps Obligation, as well as a win for ASIC in its civil penalty proceedings against Firstmac Limited.
Key findings from REP 795
ASIC found that while all issuers had policies or procedures in place for their Reasonable Steps Obligation and there were no instances of issuers asking consumers to self-certify they are in the target market, improvement is still required with respect to:
- Due diligence arrangements to assess and monitor third-party distributors’ ability to distribute a product in accordance with the TMD
- Not relying on broad search terms in online marketing for high-risk products
- Drafting consumer questionnaires with suitable design features
- Monitoring of consumer outcomes to inform product governance arrangements and future distribution practices
In more detail
Selection and supervision of distributors
Issuers should ensure that distributors have the actual capacity to distribute products in accordance with the TMD by conducting appropriate due diligence of the proposed distributor, for example, by checking the proposed distributor has access to consumers within the target market and whether they had the resources to act as the distributor for the product during the selection process.
This initial due diligence should also be supplemented with ongoing supervision of distributors, for example, by having formal agreements in place which include rights for the issuer to audit the distributor’s compliance with the TMD or to conduct sampling exercises.
ASIC notes that relying solely on a distributor’s self-certification for compliance with DDOs is unlikely to be sufficient supervision.
Training staff
Most issuers provided general training on products and features to staff involved in the distribution of a product and typically only at the point of onboarding staff. This general training often lacked detailed training on the practical application of DDOs.
ASIC observed that better practices include periodic training on DDO (at least annually), provision of updates when changes to the product, TMD or related policy occur, and role-specific training to ensure staff can effectively engage with consumers.
Marketing and promotion materials
Whilst most issuers relied on checks by compliance and legal teams before publishing materials to ensure consistency with TMD, ASIC considers the better practice is for these procedures and checklists to guide the preparation of the marketing material – for example, consideration of the TMD when preparing creative elements such as illustrations and photos and when selecting the marketing channel itself.
Online marketing strategies must also align with the target market, recognising that consumer interest does not always equate to being within the target market when broad search terms are used. ASIC noted better practices include online marketing strategies that focused on professional networks, and forums dedicated to contracts for difference (CFDs) trading for an issuer of CFDs.
Use of questionnaires
Issuers need to work on designing effective questionnaires aimed at understanding consumer attributes in order to assess whether they fall within a target market. An effective questionnaire will ensure the best responses from consumers and should not include leading or unbalanced questions, double or triple barreled questions or use of complex terms. For example, if an issuer has to contact a consumer to explain complex questions, this indicates a problem with the design of the question and the question should be reframed.
Use of information and monitoring outcomes
Issuers should leverage existing consumer information, such as income and employment status, postcodes and other web analytics, to assess target market suitability.
Ongoing monitoring will also be essential and issuers will benefit from testing the outcome of products after their distribution. Examples of better practices were highlighted by ASIC, such as one issuer altering its complaints reporting process in order to better capture its target market and improve complaints analysis, and another issuer of a high-risk product tracking results of their questionnaire which proved its effectiveness, due to the large number of consumers falling outside of their target market.
ASIC recommends that senior management should be involved in product governance, such as monitoring outcomes.
Next steps
DDO compliance remains a key focus for ASIC and the release of REP 795, as well as the minor updates to Regulatory Guide 274 Product design and distribution obligations, is a timely reminder for product issuers to review their product distribution practices and take into account the recent ASIC guidance when conducting their review.
