On October 5 a new wave of regulation is set to wash over the Australian financial industry as the product ‘Design and Distribution Obligations’ (DDO) regime goes live.
As reported last year, the DDO rules will likely cause a splash this side of the Tasman, too, with many Australian firms issuing financial products into the NZ market.
But with just two weeks to go, DDO has already seen some fund managers shut down products as new compliance costs bite, according to legendary Australian investor, Chris Cuffe.
Writing in the Morningstar-owned FirstLinks publication last week, Cuffe cites the DDO as a factor in the shuttering of at least two funds (including his own charitable vehicle) with others likely to close to “new investors rather than face the increasing administrative and compliance burden”.
To recap, the DDO rules emerged, like much new regulation in both Australia and NZ, out of the 2018/19 Royal Commission into financial services.
As the Australian Securities and Investments Commission (ASIC) guide on DDO released last December notes, the government inquiry “recommended the introduction of the design and distribution obligations as a supply-side intervention that places additional responsibility for consumer outcomes on issuers and distributors”.
The result places responsibilities on both manufacturers and distributors to have a “consumer-centric approach to the design and distribution of products”.
ASIC lists three core obligations for the various parties involved in the financial product chain, requiring:
- issuers to design products in synch with the “likely objectives, financial situation and needs” of targeted end consumers;
- issuers and distributors to take “reasonable steps” to ensure products only reach the defined client market; and,
- issuers to monitor “consumer outcomes” and review products in light of the DDO end game.
“The design and distribution obligations require issuers and distributors to develop and maintain effective product governance arrangements across the life cycle of financial products,” the ASIC guidance says. “This will result in improved outcomes for consumers of these products.”
But many in the Australian industry, including Cuffe, don’t share the regulator’s optimism.
“There is another side to the DDO regime – investor confusion and inconvenience,” he says. “… In the end, this legislation tilts the playing field even further towards the listed environment. Why is it that an investor with a CommSec, nabtrade or SuperHero account is deemed to be so much more discerning than their unlisted brethren?”
Shares are excluded from the DDO rules.
Last week ASIC also published a DDO guide for financial advisers and licensees – who fall under the ‘distributor’ definition.
“While advice licensees and financial advisers are exempt from meeting the reasonable steps obligation when providing personal advice, they still have obligations relating to reporting and record keeping,” the guide says.
Among other duties, ASIC says advisers must take note of the obligatory issuer-produced ‘target market determination’ (TMD), defined as the “written document that describes the class of consumers comprising the target market for a product”.
“… while advice licensees and financial advisers providing personal advice are exempt from taking reasonable steps to ensure products are distributed consistently with the TMD, we expect them to consider the TMD as part of meeting their best interests duty in the same way they would consider other sources of research or information about a financial product,” the Australian regulator says.
The ASIC guide foreshadows some of the obligations likely to fall on the NZ advisory industry under the imminent Financial Markets (Conduct of Institutions) Amendment Bill, or COFI to its friends.
While not an exact replica of the DDO regime, COFI also traces its origins back to the Royal Commission with a similar goal of linking product design and distribution to ‘fair conduct’ principles.
COFI has stalled in parliament since its interrupted second reading on June 10 with government distracted by other priorities. The bill was third in line for attention in the September 9 parliamentary session but has dropped back to 22nd in the latest schedule of business when the house resumes this Tuesday (September 21).
Meantime, the Ministry of Business, Innovation and Employment has yet to report back on two key consultations closed off on June 18 covering broad COFI regulations and the treatment of intermediaries under the proposed legislation.