A review of ASIC's proposed guidance on how it plans to administer the new financial product design and distribution obligations (DDOs) reveals the devil may not be in the detail. Special Counsel Matt Moses explores the very high-level proposed guidance from the regulator and shares some practical takeaways for fund managers around governance processes, compliance frameworks, and distribution strategy.
The DDOs were legislated back in April 2019, but do not come into effect until April 2021. Just before Christmas, ASIC released Consultation Paper 325 together with a draft regulatory guide seeking input from the industry by 11 March 2020. We earlier reported on the DDOs in the May 2019 edition of Fundamental.
The material released is lengthy—the Consultation Paper is 55 pages long, and the draft regulatory guide is almost 80 pages. Given the seismic shift to come about from the new regime in relation to how products are designed and sold and generally how fund managers and other issuers interact with consumers, there will be many eyes pouring over ASIC's words. They will be looking for some concrete sign-posts on how the regulator sees these new obligations working in practice, particularly given the quasi-financial advisory burdens some see as being imposed on issuers under the laws. However, the extremely broad nature of the obligations has (maybe unsurprisingly) led to very high-level proposed guidance from the regulator, with little in the way of any detailed practical rules a fund manager, for example, might follow.
In this regard, in the Consultation Paper, ASIC has said:
Our objective is for the guidance to be clear and useful, and to provide issuers and distributors with tools and direction to assist them to meet the design and distribution obligations. However, given the breadth and scalability of these obligations, which apply across the entire financial services sector, the draft regulatory guide is intentionally high-level, and principles-based.
This approach flows through ASIC's draft guidance. ASIC says it is up to product issuers and distributors to formulate their own approaches to implementing and complying with the new requirements. ASIC also recognises this is new territory for the Australian industry and the industry's approach. The regulator's approach is likely to develop and change over time, as everyone gets some experience under their belts (and presumably, as common approaches start to emerge across different product classes).
The high-level 'principles-based' approach is on the one hand positive, given that it will allow a fair bit of flexibility in how issuers and distributors go about interpreting and applying the design and target market obligations, especially in the remaining transition period. However, at the same time, some might think this regulatory approach does not help in delivering certainty around exactly what ASIC expects in relation to things such as what a target market determination for a particular type of product should look like. ASIC has said it does not propose to give definitive guidance on the content and form of any target market determinations, or on the formulation of a target market, because a 'one-size-fits-all approach' would not be appropriate. It seems it is up to the industry to develop approaches over time which hopefully become industry norms.
Given the principles-based approach ASIC is taking, there are some interesting points made by ASIC, some of which might lead to head scratching, especially in the absence of further clarification. One example is ASIC saying it considers issuers and distributors should not take advantage of 'behavioural biases' or factors that can impede consumer outcomes (eg the effect of behavioural bias on consumer interaction with information). Issuers and distributors should also consider 'consumer vulnerabilities' and how those vulnerabilities might increase the risk that products sold to consumers do not meet their needs and may lead to poor consumer outcomes.
Examples of some more practical points from ASIC's guidance include the following:
It will be interesting to see the industry's response and the approaches to the new obligations which will no doubt develop over the coming year and beyond.