New provisions under the Corporations Act 2001 (the Act) came into effect on 5 October 2021 as a result of amendments made by the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019.
These amendments establish the new Design and Distribution Obligations Regime (DDOR) in an effort to increase consumer protection within the financial services industry. The overarching aim of the DDOR is to address limitations associated with disclosure, financial advice and consumer financial literacy in the financial products market. as identified by the 2014 Financial System Inquiry.
Distributors and issuers of financial products should be aware of additional obligations imposed under the DDOR and will need to review these new provisions carefully to ensure that they do not engage in contravening distribution conduct.
One of the significant obligations imposed by the DDO is the requirement for issuers and distributors of certain financial products to make a “target market determination” (TMD) in respect of each financial product (s. 994B of the Act).
Broadly, a TMD is a document which describes a class of retail clients deemed to be a suitable market for a financial product. TMDs must also meet the requirements set out in sections 994B(5) & 994B(8), including the specification of any conditions and restrictions on retail product distribution conduct; and description of events and circumstances that would reasonably suggest the TMD is no longer appropriate.
Pursuant to section 994B of the Act, a TMD for a financial product is required in the following circumstances:
if, under Part 6D.2, the person is required to prepare a disclosure document for the product; or
if, under Part 7.9, the person is required to prepare a Product Disclosure Statement for the product; or
if the product is covered by paragraph 994AA(1)(b) and: (i) the person issues the product to another person as a retail client; or (ii)the person sells the product under a regulated sale; or
if regulations made for the purpose of section 994B require the person to make a TMD for the product.
Businesses that issue or distribute financial products which are covered by the DDOR should also be aware of their obligations to ensure businesses activities are consistent with TMDs, including:
taking reasonable steps to ensure retail distribution conduct is consistent with the TMD prepared for each product;
not engaging in “retail distribution conduct” in relation to certain financial products on offer to retail clients unless a TMD has been made (subject to exceptions);
notifying ASIC of any significant dealings in a product which are not consistent with the product’s TMD;
amending or replacing a TMD in circumstances where a “review trigger” renders the TMD inappropriate;
ensuring advertising and promotional material issued in respect of a financial product to make reference to the product’s target market; and
keeping records in relation to the preparation and use of TMDs (particularly if the financial product is issued to “retail clients”), including records of decision making processes, review periods, and complaints.
Hope Earle Lawyers has extensive experience advising clients in the financial services industry. If your business will be affected by these new provisions and you wish to obtain advice in relation to your obligations under the Act, please contact our knowledgeable corporate law team on (03) 9600 3330 or via the contact details below.