ASIC has released Regulatory Guide 274 Product design and distribution obligations (RG 274).
The design and distribution obligations require firms to design financial products to meet the needs of consumers and to distribute their products in a more targeted manner. Background.
They require issuers and distributors to focus on consumer outcomes at each of the product design, product distribution, and monitoring and review stages of the product life cycle
The obligations will take effect on 5 October 2021.
ASIC says that the main issues raised during consultations related to:
(a) the arrangements required to be implemented in order to comply with the design and distribution obligations;
(b) the approach that issuers should take when preparing the target market determination (TMD), including the level of granularity of the target market description and the form of the TMD when products are bundled or can be customised at point-of-sale;
(c) the steps that issuers and distributors will need to consider taking to meet their reasonable steps obligation; and
(d) the application of the design and distribution obligations to certain products, issuers, and distributors.
Customer-centric outcomes
ASIC has provided examples throughout RG 274 to illustrate the approach it says issuers and distributors should take in complying with the design and distribution obligations.
Although ASIC has not defined ‘vulnerability’, it has provided further information in Note 1 at RG 274.47, setting out a non-exhaustive list of factors that can contribute to vulnerability.
Product governance arrangements
ASIC says that appropriate product governance arrangements are a necessary component of compliance with the design and distribution obligations.
In RG 274 ASIC has noted the recent judgment in ASIC v CBA that highlighted the need for effective product governance arrangements to comply with section 912A Corporations Act licensee obligations and support the effective provision of products.
Effective arrangements will reduce the risk of products being sold to consumers that are not consistent with their likely objectives, financial situation, and needs.
Target market determination
ASIC has also explained in RG 274.100 that to satisfy the appropriateness requirement in section 994B(8)(a), the target market determination (TMD) must explain why the distribution conditions will make it likely that the consumers who acquire the product are in the target market.
To satisfy the appropriateness requirement in s994B(8)(b), the TMD must include sufficient information to explain why the product, including its key attributes, is likely to be consistent with the likely objectives, financial situation, and needs of consumers in the target market.
As part of this, an issuer will generally need to set out in the TMD:
• a description of the likely objectives, financial situation, and needs of consumers in the target market;
• a description of the product, including its key attributes; and
• an explanation of why the product (including its key attributes) is likely to be consistent with the likely objectives, financial situation, and needs of consumers in the target market.
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Author: David Jacobson
Principal, Bright Corporate Law
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About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.
