Increased regulation at the product level will be a major focus in 2020. The changes in Pt 7.8A of the Corporations Act which commence on 5 April 2021 affect the development and marketing of financial and credit products. This note covers the Corporations Amendment (Design and Distribution Obligations) Regulations 2019, ASIC’s guidance for the new product design and distribution obligations and APRA’s consultation on proposed product responsibility requirements under the Banking Executive Accountability Regime. Background.
ASIC’s guidance addresses the interaction between the design and distribution obligations and existing law, including personal advice obligations and responsible lending.
Extension of product design and distribution obligations
The Government has made the Corporations Amendment (Design and Distribution Obligations) Regulations 2019 which alter the products and persons in relation to which the regime applies and extend the regime to additional persons and products and exclude certain persons and products from its operation.
The Regulations extend the distribution obligations in the DDO to the following persons by prescribing them as regulated persons:
- a person that is exempt under paragraph 926B(1)(a) of the Corporations Act from the requirement in section 911A of the Corporations Act to hold an Australian financial services licence for a financial service;
- product distributors of basic deposit products, general insurance products and bundled consumer credit insurance products;
- credit licensees and credit representatives; and
- issuers of extended operation financial products (i.e. Australian Securities and Investments Commission Act 2001 (the ASIC Act) financial products that are not financial products within the meaning of the Corporations Act).
The Regulations extend the DDO regime so that it applies in relation to the following products:
- simple corporate bonds: depository interests in simple corporate bonds, where the simple corporate bonds are, or are to be, issued under a 2 part simple corporate bonds prospectus;
- debentures of a body that is an authorised deposit-taking institution (ADI) or registered under section 21 of the Life Insurance Act 1995;
- basic banking products;
- investor-directed portfolio services;
- exchange traded funds; and
- custodial arrangements that are not already subject to the new regime.
The Regulations exclude the following products from the DDO regime:
- interests in eligible rollover funds;
- defined benefit interests;
- medical indemnity insurance products;
- depository interests in foreign fully paid ordinary shares, if the DDO regime would not otherwise apply to the shares;
- bank drafts (and money orders issued by or for Australia Post);
- financial products not received in this jurisdiction that are not already excluded from the DDO;
- credit facilities not issued in the course of a business of providing credit;
- credit provided for business purposes;
- certain ‘credit facilities’ that do not involve the provision of credit;
- the provision of a mortgage (as distinct from the credit contract secured by the mortgage); and
- credit provided by pawnbrokers.
ASIC has outlined its proposed guidance for the new product design and distribution obligations in Consultation Paper 325 Design and Distribution Obligations (CP 325). The obligations require the sector to develop products that meet the needs of consumers in their intended target market. They come into effect on 5 April 2021.
An issuer must take reasonable steps that will, or are reasonably likely to, result in distribution being consistent with the target market determination for the financial product (reasonable steps obligation): see s994E(1).
The consultation covers ASIC’s proposed guidance on the design and distribution obligations, including:
- introducing a product governance framework to support a consumer-centric approach in product design and distribution;
- obligations for issuers of financial products;
- obligations for distributors of financial products;
- the interaction between the design and distribution obligations and existing law, including personal advice obligations and responsible lending, and
- ASIC’s proposed approach to administering the obligations.
Product responsibility requirements under BEAR
APRA has announced that it is delaying its proposed product responsibility requirements under the Banking Executive Accountability Regime in order to align the product responsibility proposal with the government’s proposed extension of the BEAR.
APRA proposes requiring ADIs to identify and register an accountable person (that could be a person already registered as an accountable person) to hold end-to-end product responsibility for each product the ADI offers to its customers, including retail, business and institutional customers. Background.
APRA will provide a further update on its revised approach to implementing product accountability in the first half of 2020.