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Enforcement of Design and Distribution Obligations: ASIC issues first DDO stop orders – Financial Services



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ASIC’s recent enforcement action in relation to the Design and Distribution
(“DDO”)
regime is a wakeup call for
licensees who are issuers of financial products to retail clients.
ASIC has used its powers to place interim stop orders on three
financial firms, preventing these firms from issuing financial
products to retail investors. ASIC’s enforcement activities in
these cases focussed on Target Market Determinations
(“TMD“) which were considered
deficient.

ASIC’s Priorities

This enforcement action shows that ASIC’s focus has shifted
from education regarding the DDO, to enforcing compliance. The
three financial firms that were the target of this enforcement
failed to meet the DDO by:

  • failing to adequately identify the consumers they intended to
    target;

  • failing to exclude certain categories of investors from the
    target market.

ASIC’s concern in these enforcement actions was that the
products were made available to retail consumers for whom they were
not appropriate, or too risky.

What Next?

Licensees that issue financial products to retail clients should
consider these initial stop orders as a warning and review their
product governance arrangements to ensure it properly addresses
ASIC’s concerns in these cases.

ASIC has been clear that it considers industry has had
sufficient time to educate itself regarding the DDO and that it
will now proceed to use its powers and the penalties available to
it to enforcement these obligations.

Issuers of financial products should:

  • Ensure product governance arrangements are implemented and
    updated as required. Much of an issuer’s compliance with the
    DDO will be driven by its product governance arrangements:

    • Assess each existing retail product by
      considering:

      • the key attributes of the product

      • the consumer objectives, financial situation and needs for
        which the product is likely to be appropriate

      • the distribution arrangements for the product and determine
        whether they need to be reviewed and adjusted

      • any significant dealings in the product which may require the
        product to be redesigned or ceased


    • Assess each new retail product by:

      • identifying the class of consumers that are likely to have
        objectives, financial situation and needs which could be met by the
        product

      • ensuring the design of the product is driven by the identified
        target market

      • conduct robust testing of the product

      • determine how consumer outcomes will be measured and
        monitored


    • Identify all retail products offered or proposed to be
      offered

    • Consider your target market for each retail product, including
      any category of consumer that should be excluded from the target
      market

    • Develop a TMD for any new products and consider any amendments
      that may be required to existing TMDs.

ASIC’s DDO Enforcement Agenda

ASIC’s Corporate Plan for 2021 – 2025
identifies four strategic priorities, one being product design and
distribution. ASIC’s focus is to supervise and enforce the DDO
and the Corporate Plan states that ASIC will use the full extent of
the powers provided to it to enforce compliance by licensees with
the DDO.

ASIC’s focus on reducing the risk of harm to consumers which
can be caused by poor product design means that they will increase
enforcement activities in relation to non-compliance with the DDO
and take action to disrupt poor conduct and prevent harm.

ASIC Deputy Chair, Karen Chester said:

“The design and distribution obligations were created
to deliver better consumer outcomes. Under the law, firms must
embed a consumer-centric approach. They need to design financial
products that meet the needs of consumers in their intended target
market, and distribute those products in a targeted
way.”1

Background

The DDO regime came into effect on 5 October 2021. The DDO apply
to a range of financial products under the Corporations Act 2001
(“Corporations Act“), ASIC Act 2001 (“ASIC
Act
“) and National Consumer Credit Protection Act
2009
(“NCCP Act“) and are
intended to help consumers obtain appropriate financial and credit
products by requiring issuers and distributors to have a
consumer-centric approach to designing and distributing
products.

Further reading

Footnote

1 ASIC Media Release

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