ASIC is calling on product issuers to ensure distribution practices are up to scratch, pointing to flawed consumer questionnaires being the catalyst for some recent interim stop orders.
The call to action follows ASIC's latest design and distribution obligations (DDO) surveillance, which looked at the obligation for product issuers to take reasonable steps to support appropriate distribution of their products. Poor product design and distribution puts consumers at risk of financial harm as they can end up with products that don't meet their needs.
ASIC reported the findings of its surveillance of 19 issuers of high-risk investment, insurance and credit products between October 2023 and August 2024 in Report 795 Design and distribution obligations: Compliance with the reasonable steps obligation (REP 795).
ASIC Commissioner Alan Kirkland said while issuers had made inroads, improvements across the board are still required, so consumers can feel confident that the products they purchase suit their needs.
"This review provides a snapshot of compliance with the design and distribution obligations across multiple industries and products. Where there are opportunities to improve, we expect product issuers and distributors to reflect on the report's findings and improve their distribution practices," Mr Kirkland said.
ASIC's review revealed:
- many issuers had limited due diligence arrangements to assess and monitor third party distributors
- some issuers of high-risk products were relying on broad search terms in online marketing
- many issuers used poor quality consumer questionnaires, and
- only a few issuers monitored consumer outcomes and product performance.
The report recommends issuers improve distribution practices regarding the selection and supervision of distributors, training staff, marketing materials, consumer questionnaires, and information and monitoring outcomes.
"Since the design and distribution obligations took effect in late 2021, ASIC has taken action to improve compliance with the law. We have commenced five civil proceedings, with three successful outcomes to date, issued over 80 stop orders and published the results of seven reviews," Mr Kirkland said.
"In ASIC's case against Firstmac Limited, the Federal Court found Firstmac breached its obligations when it sent product disclosure statements for one of its products to existing term deposit holders, without first taking reasonable steps to ensure consistency with its target market determination for the product.
"While we await a decision on the penalty, this ruling highlights the importance of having a clear policy on distribution obligations that is circulated to customer-facing staff, who also receive appropriate training and monitoring."
Today, ASIC also released minor updates to Regulatory Guide 274 Product design and distribution obligations (RG 274) to provide greater clarity around ASIC's guidance on the appropriateness requirement for target market determinations (TMDs). The changes to RG274 will not require product issuers to update their TMDs.
Mr Kirkland said DDO compliance remains a key focus for ASIC.
Background
The DDO regime aims to help consumers obtain appropriate financial products by requiring issuers and distributors to have a consumer-centric approach to the design and distribution of products. Under DDO, an issuer must take reasonable steps that will, or are reasonably likely to, result in distribution being consistent with the TMD.
REP 795 follows Report 762 Design and distribution obligations: Investment products (REP 762) and Report 770 Design and distribution obligations: Retail OTC derivatives (REP 770).
As part of ASIC's latest review, ASIC raised concerns with a number of issuers who agreed to make changes to improve their compliance with the reasonable steps obligation. ASIC also issued two interim stop orders after observing reliance on a poor-quality consumer questionnaire by an issuer of a high-risk investment product (refer 24-109MR).
ASIC has issued two other interim stop orders for similar concerns related to poor-quality questionnaires (refer 24-120MR and 23-141MR). These stop orders were revoked after the entities made changes to the questionnaires and, in some cases, to other areas relating to compliance with the reasonable steps obligation.
Downloads
- Report 795 Design and distribution obligations: Compliance with the reasonable steps obligations (REP 795)
- Regulatory Guide 274 Product design and distribution obligations
