With the recent commencement of the design and distribution regime, product issuers were required to comply with the new requirements by 5 October 2021.
The design and distribution obligations (DDO) regime introduces a new approach to regulation, by moving away from relying on disclosure as the main form of consumer protection, and introducing new measures to ensure that products are designed and distributed with consumers in mind.
If you're a product issuer, you've now probably had some time to look around and compare your target market determination/s (TMD) to your competitors, given that they should be publicly available. You've probably also had a chance to update your marketing-related disclaimers to ensure that they either include a description of the target market, or explain where the publicly-available TMD can be found.i
If you're a distributor under the new regime, you've hopefully had a chance to check that your approved products are appropriate for your clients and get a good sense of what product issuers are expecting from you.
However, if you're having a look over the fence at what your competitors are doing, it will be far more difficult, if not impossible, to get a sense of how they're actually complying with the rest of the DDO, or how they're seeking to comply with ASIC's guidance on DDO.
Product governance arrangements
One of those areas, where you're unlikely to have a good sense of what your competitors are doing, is working out how they're complying with the expectation that they implement and maintain robust product governance arrangements, to ensure they comply with the DDO.ii
You also won't find a reference to what product governance arrangements are in the legislation. That's because the concept of product governance arrangements originates from ASIC's guidance on how to comply with the DDO, as set out in ASIC's RG 274 Product Design and Distribution Obligations.
Put simply, product governance arrangements are the systems, processes and procedures in place across the lifecycle of financial products which can help ensure that an issuer or distributor complies with the DDO.
However, from a practical perspective, what does this mean?
Putting a policy in place, that you've named the Product Governance Arrangements policy, and filing this in your top draw, is unlikely to help you ensure that you're complying with the DDO (although we can see why a DDO policy would be a very sensible way to document how your organisation is more broadly complying with DDO). This is because you need to consider your systems, processes and procedures as a whole, for the purpose of ensuring that your product governance arrangements are fit for purpose.
There are no set requirements for the purpose of ensuring your product governance arrangements are adequate, and this will differ based on your organisation's specific circumstances.
In our view, your product governance arrangements should address who within your organisation is responsible for performing the relevant DDO-related functions, and who is accountable for these functions.
For example, if you're a product issuer, you really need to consider:
- who is responsible for product design? Who are the members of your Product team who are responsible for product design?
- who is responsible for the approval of product design? (e.g. the Board, a delegation of the Board (if permitted from a regulatory perspective based on the financial products in question), investment committees, compliance committees, senior management, including your Head of Product (or equivalent) or a combination of these stakeholders)?
- for investment products - knowledge and expertise in relation to the relevant underlying assets (e.g. fixed income in relation to a registered managed investment scheme that invests in fixed income assets, or crypto assets, in the case of a CFDs issuer, where the underlying for the CFDs is a crypto asset, etc.);
- determining what the reasonable steps in relation to distribution are and, separately, taking those steps;
- who is responsible for Product-related business and operational risk management (is your Product team responsible for this or is this managed by a centralised Risk team?);
- who are the relevant stakeholders who are responsible for product disclosure?
- breach and reportable situation reporting;
- product administration and operational functions in relation to the product;
- complaints handling (including your existing complaints policy); and
- conflicts of interest.
The list goes on. Of course, if you're a distributor, your obligations won't look exactly like those that appear above and you'll be focused on all matters concerning distribution. Your considerations would also include establishing appropriate distribution channels, your own reasonable steps obligations, and your obligations in relation to significant dealings, just to name a few.
The above suggestions do not form a comprehensive list of what you need to do, to ensure that your product governance arrangements are adequate, but, hopefully, you'll find this list helpful in considering your ongoing obligations under this still very new regime.
Apart from documenting the above, you'll then need to ensure that those matters are actually incorporated into the rest of your policies and processes which set out how the above functions are essentially going to be performed.
So, if you're a product issuer, for example, we would expect you would consider how the following aspects of product design are addressed:
- product specifications - typically, we'd expect to find a product specification document that is maintained by your Product team and sets out all of the specifications, functions, characteristics, limitations and the legal basis upon which your financial products are to be issued and how they are to be distributed. We would expect such a document would be reviewed and approved by all relevant stakeholders within your business (e.g. Product, Business Operations, Legal and Compliance, Tax, Finance, etc.). Many product issuers would have already developed product specification documents prior to the specific implementation of the DDO regime;
- approval of product design - Board papers noting such considerations and approvals (i.e. papers written by Management and submitted to the Board for the Board's consideration), legal advice and Board minutes evidencing Board approvals. Where permitted by law, and where appropriate (depending on the type of financial product), some of these functions can be performed by a sub-committee/delegation of the Board;
- compliance policies, including in relation to complaints handling and conflicts of interest;
- ongoing review of the TMD, and ongoing periodic review of the relevant financial products - again, Board papers (i.e. papers written by Management and submitted to the Board for the Board's consideration regarding the establishment of the financial products, assessment of their ongoing performance, and any review of the TMD, etc.), legal advice and Board minutes evidencing Board approvals. Some of these functions can be performed by a sub-committee/delegation of the Board;
- systems, documentation and reporting functionality that has been implemented for the purpose of receiving prescribed reporting from distributors (e.g. complaint and significant dealings data).
Distributors would, of course, need to separately consider their own distribution obligations under the DDO regime and how they can ensure these are being met.
The above list is not intended to be a prescriptive list (in the case of product issuers) but is intended to get you thinking about your existing arrangements. Whether you're a product issuer, distributor, or both, as you work through the DDOs and set up your product governance frameworks, don't lose sight of the fact that it is about improving consumer outcomes.
We've developed DDO templates for both product issuers and distributors for our HN Hub subscribers, who also have access to around 250 other policies, procedures and ongoing training tools.
iSee section 1018A of the Corporations Act 2001.
ii ASIC's RG 274 at [274.32].
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.