Be careful at the checkout – new Guide for issuers and distributors of financial products

On Friday 11 December 2020 ASIC released its new Regulatory Guide 274 - Product design and distribution obligations (Guide) for issuers and distributors of financial products.¹  The release followed months of industry consultation, as well as an extension due to the impacts of COVID-19.

The product design and distribution obligations (Obligations) are contained in Part 8.8A of the Corporations Act 2001 (Cth) (the Act), and were passed by Federal Parliament in 2019, subsequent to a recommendation of the Financial System Inquiry.  The obligations are scheduled to take effect on 5 October 2021.

The obligations are designed to require issuers and distributors of financial products to adopt a consumer-centric approach to the design and distribution of their financial products, so that consumers can obtain financial products appropriate to their circumstances.²

The obligations are not an individualised product suitability test at the point of sale, rather, issuers and distributors will need to develop and maintain effective product governance arrangements over the life cycle of the financial products for the target market and class of consumer. This is to ensure that their consumers receive products that are likely to be consistent with their likely objectives, financial situation and needs.  

The coverage of the obligations is set out in section B of the guide. However, the following financial products are excluded:

• MySuper products;
• margin lending facilities;
• most ordinary shares;
• securities issued under an employee share scheme; and
• other products prescribed by the Corporations Regulations.³

The obligations are lengthy. They include:

• preparing a target market determination (TMD);
• that an issuer must take reasonable steps that will, or are reasonably likely to, result in a distribution being consistent with the product’s TMD;
• if an issuer becomes aware of a significant dealing in the product that is not consistent with the TMD, it must notify ASIC as soon as practicable (within 10 business days); and
• distributors must keep complete and accurate records of distribution information, including the number of complaints received about a product, and information specified by the issuer in the TMD.⁴

The Guide is intended to explain ASIC’s:

• interpretation of the obligations
• expectations for compliance; and
• approach to administration.⁵

The Acting Chair of ASIC, Karen Chester has commented:
ASIC’s guidance was greatly enhanced by the valuable input received from industry through an extensive consultation process. Engagement with industry was particularly important as the obligations require firms to set their own boundaries to suit their business, products and customers. If they stay within these boundaries this will mean less enforcement action from ASIC and the opportunity for deregulatory initiatives over time.⁶ 

As ASIC noted in its press release ‘in many cases firms are already well progressed and implementing the reforms in the context of their businesses and product offerings’.⁷  Although the deadline for compliance does not begin until 5 October 2021, individuals and organisations should ensure that they start the process early to ascertain whether:

• they will be subject to the obligations;
• their services fall within the meaning of ‘financial products’ under the Act; and
• that they have appropriate policies, systems and relevant precedents in place that conform with their obligations in light of ASIC’s interpretation.

If you require assistance with this process, please do not hesitate to contact Lavan’s Litigation and Dispute Resolution team.

Click here to read a copy of the guide.