23-115MR ASIC calls on investment product issuers to ‘lift their game’ on design and distribution obligations

ASIC published REP 762 Design and distribution obligations: Investment products, urging investment product issuers to improve their compliance with DDO following a review that revealed significant deficiencies.
To recall, the DDO framework requires financial product issuers and distributors to ensure that their products are designed with the best interests of consumers in mind and are distributed in a targeted manner. In addition, financial product firms are obligated to monitor outcomes and regularly review their product governance arrangements. The TMD is a mandatory public document under the DDO that outlines the class of consumers for which a financial product is likely to be appropriate and provides relevant information on the product’s distribution and review.
Of note, ASIC has issued stop orders against 11 issuers of managed investment schemes and 7 issuers of other investment products for DDO breaches, including well-known firms such as BT Advance Asset Management and Perpetual Investment Management. ASIC has also conducted risk-based surveillances on several financial products, including buy now pay later and credit cards, to ensure compliance with the DDO framework and protect consumers.
REP 762 highlights the need for a consumer-centric approach to product design and distribution and provides practical observations and recommendations to help issuers comply with the design and distribution obligations and improve consumer protection. It provides an overview of the design and distribution obligations for investment products and to identify areas for improvement. Theses obligations were introduced in October 2021 to ensure a consumer-centric approach to product design and distribution. Issuers are required to prepare a TMD reflecting a class of consumers whose objectives, financial situation, and needs are met by the product. Issuers and distributors must ensure products reach the defined target market and review products to ensure they meet consumer objectives, financial situation, and needs.
The report notes that ASIC conducted an initial review of compliance with the obligations by investment product issuers and found significant room for improvement. The report provides practical observations regarding product design and approval process, TMDs, and meeting reasonable steps obligations. Committees for overseeing compliance were typically proactive only during TMD development and generally inactive after product launch. The report recommends that issuers continuously monitor and respond to ongoing design and distribution issues across an issuer’s business.
Hence, the report emphasizes the importance of ongoing monitoring and review arrangements. Issuers must review TMDs at specified periods, in response to review triggers, or when other circumstances suggest a TMD is no longer appropriate. If a review finds that a product is not operating as intended or presents significant consumer harms, issuers must take action.