Product governance

  • A new governance challenge — product governance — is approaching for financial product issuers and distributors.
  • Design and distribution obligations (DADO) were scheduled to commence on 5 April 2021 but due to the COVID-19 pandemic, have been postponed until 5 October 2021.
  • ASIC’s draft guidance recommends that issuers and distributors have a documented ‘product governance framework’ across the life cycle of financial products.

Design and distribution obligations (‘DADO’) introduced by the federal government will require financial product issuers to identify the target market for each of their products and compel financial product distributors to take reasonable steps to distribute consistently with the target market.

The introduction of DADO in Australia was originally recommended back in 2014 by the Financial System Inquiry headed by David Murray,1 and legislation to give effect to DADO was enacted in April 2019.2

Australia is following in the steps of other jurisdictions including the UK, Hong Kong, Singapore and the EU, which already have product design and distribution obligations, also known as ‘product governance’ regimes.

DADO was scheduled to commence on 5 April 2021 but due to the COVID-19 pandemic, has recently been postponed until 5 October 2021.3 Even so, there is a lot of preparation to be done.

Who is subject to DADO?

DADO applies to any person who issues or sells a financial product regulated by DADO (see below) to a retail client or who is required to prepare a PDS or disclosure document for the product (an ‘issuer’).

DADO also applies to any person who distributes a regulated financial product (a ‘distributor’). A distributor includes persons who engage in ‘retail product distribution conduct,’ such as dealing in a product or providing financial product advice in relation to a retail client, or giving a PDS or disclosure document to a retail client.

An issuer may also be a distributor if it distributes its own products.

Regulated financial products

Some of the main financial products covered by DADO include:

  • products that require a PDS or a disclosure document to investors about securities
  • credit contracts and consumer leases regulated by the National Credit Code (‘Code’)
  • credit that is not regulated by the Code
  • simple corporate bonds and depository interests in simple corporate bonds
  • debentures of an ADI or registered life insurance company
  • basic banking products
  • investor-directed portfolio services
  • exchange-traded funds.

There are also several product types which are specifically excluded from the DADO regime, such as:

  • mySuper products
  • margin lending facilities
  • securities under an employee share scheme
  • fully paid ordinary shares in a company or foreign company (with some exceptions)
  • interests in eligible rollover funds
  • defined benefit interests
  • medical indemnity insurance products
  • credit facilities not issued in the course of a business of providing credit
  • credit provided for business purposes
  • various ‘credit facilities’ that do not involve providing credit
  • credit provided by pawnbrokers.

DADO applies to both new products first issued after DADO commences and to existing products being issued when it commences, which means that issuers and distributors will need have applied the DADO requirements to existing product lines in time for the start date next year.

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DADO issuer obligations

DADO requires product issuers to:

  • make a publicly available target market determination (‘TMD’) for each product
  • take reasonable steps that will (or are reasonably likely to) result in distribution that is consistent with the TMD
  • review the TMD as required to ensure it remains appropriate
  • keep records of their decisions in relation to DADO
  • notify ASIC of any significant dealings in a product that are not consistent with its TMD.

DADO distributor obligations

Product distributors under DADO must:

  • not engage in retail product distribution conduct in relation to a regulated product if a TMD has not been made or may no longer be appropriate
  • take reasonable steps so that retail product distribution conduct is consistent with the TMD
  • collect information specified by the issuer and complaints related to a product and provide to the issuer
  • notify the issuer of any significant dealings in a product that are not consistent with the TMD.

Target market determination (TMD)

The TMD is the key element of the DADO regime.

A TMD must be in writing and:

  • describe the class of retail clients who are the target market for the product
  • specify any conditions and restrictions on retail product distribution conduct
  • specify events and circumstances that would reasonably suggest the TMD is no longer appropriate
  • specify maximum review periods
  • specify reporting periods for when complaints about the product should be given by the distributor to the issuer
  • specify the kinds of information needed to promptly determine that a TMD may no longer be appropriate, and specify which distributors should provide those kinds of information, and reporting periods for providing the information.
The product governance framework would detail the responsible parties, the timeframes involved, and associated record-keeping and reporting.

Product governance framework                          

ASIC has issued draft guidance4 on DADO and final guidance is expected to be released by mid-2020.

ASIC recommends that issuers and distributors have a documented ‘product governance framework’ across the life cycle of financial products, which would cover the key stages of product design, product distribution, and monitoring and review (post-sales review).

The product governance framework would detail the responsible parties, the timeframes involved, and associated record-keeping and reporting.

The draft ASIC guidance says that the product governance framework should be fully implemented in the day-to-day conduct of business and integrated into the culture of the business, and that use of the framework should be monitored and reported on, with regular reviews conducted on the effectiveness of the framework, so that it can be updated when necessary.

At the product design stage, ASIC expects frameworks to include a product approval system which:

  • identifies the target market of a product (either before or as part of its design)
  • tests the product and the systems that will support it
  • determines how to measure and monitor consumer outcomes.

At the product distribution stage, ASIC says that the product governance framework should include processes and controls to reduce the risk of issuing products to consumers that are inconsistent with their objectives, financial situation and needs, and should include effective communication between product designers and the marketing and distribution teams.

At the monitoring and review stage, ASIC says that the product governance framework should provide for an ongoing, iterative and responsive design and distribution process with regular monitoring and review of product performance, and improvement of design and distribution when necessary.

Action steps                                                          

Some of the steps that issuers and distributors could begin now to prepare for DADO include:

  • building a project team for DADO implementation
  • documenting a product governance framework
  • identifying affected products
  • for issuers, preparing TMDs for those products
  • ensuring that information collection and conduct monitoring mechanisms are sufficient to meet DADO
  • reviewing and amending issuer/distributor agreements so that they are consistent with DADO requirements
  • making sure that actions in relation to DADO are properly recorded.

 

Patrick Dwyer can be contacted on 0406 404 892 or by email at patrick.dwyer@dwyerharris.com

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