The Australian financial regulator has warned investment firms of a looming crackdown on product design and distribution obligations (DDO) compliance following a review that found the industry struggling with the rules more than 18 months after the regime came into force.
Almost 20 issuers have been pinged by the Australian Securities and Investments Commission (ASIC) over DDO breaches relating to 26 products – including several available in NZ – since the regulations went live in October 2021.
Under the DDO regulations fund managers and other investment providers must clearly identify target markets for retail clients while ensuring their third-party distributors comply.
But the regulatory review of some 640 funds issued by 12 providers found “deficiencies across the board, and by large and small product issuers alike”, according to ASIC deputy chair, Karen Chester.
“Closer scrutiny of DDO is coming,” Chester said in a release. “All investment product issuers should read our report, assess their practices, and address any gaps informed by our findings.
“In coming months, ASIC will begin to review how product issuers interact with their distributors to ensure they are not straying beyond their target market, how they monitor product governance arrangements and review data to ensure retail investors are receiving suitable products on an ongoing basis.”
She said the regulator “won’t hesitate” to crack down harder with multiple civil legal actions and ASIC investigations over potential DDO breaches already underway.
The ASIC review found there was “considerable room for improvement” in DDO practices across the industry including with monitoring of external distributors.
“Most issuers of managed investment schemes we reviewed used third-party distributors,” the review says. “These include platform providers, sales staff or financial advisers who provide general advice.
“To meet the reasonable steps obligation, issuers should assess the capacity of distributors to comply with distribution conditions and to meet the design and distribution obligations more broadly, including the likelihood of a distributor’s conduct being inconsistent with the TMD [target market determination].”
In NZ, the 2022 Financial Markets (Conduct of Institutions) Amendment Act (COFI) introduces some DDO-like rules for retail client product suitability and distribution-monitoring duties for banks and insurers – but the regime does not extend to licensed fund managers.
And while hundreds of Australian funds are offered in NZ under the trans-Tasman Mutual Recognition treaty, the DDO rules end at the border, according to an ASIC spokesperson.
“DDO only applies to Australian retail clients (more specifically, DDO only applies to an offer or issue of a product received in this jurisdiction),” the spokesperson said.