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Financial Services Reforms - Design and Distribution Obligations commenced October 2021

From 5 October 2021, issuers and distributors of 'financial products' - including mortgage brokers, AFS licensees and authorised representatives - need to comply with new product design and distribution obligations (PDDO), which, in some circumstances, includes the requirement to develop, comply with and review a document known as a target market determination (TMD).

This article outlines what the laws are, who must comply, what is required to comply and where further information and assistance may be obtained.

Alisha Shamim, Maddocks Lawyers
  1. What are the PDDO laws?

    The PDDO laws 1 have been developed with consumers in mind. They are intended to assist consumers to acquire financial products that are appropriate for them. The PDDO laws seek to achieve this by imposing additional obligations on 'issuers' and 'distributors' of 'financial products' (these terms are explored in the next section) across the lifecycle of financial products.

    Please note that, as at the time of writing this article, it has been foreshadowed that there may be some changes to the PDDO laws - see here.

  2. Who must comply with the PDDO laws?

    Determining who the PDDO laws apply to can be a complex task, as it involves considering whether you are an issuer or distributor of financial products, or both. Accordingly, the requirement to comply will depend on the meaning of 'issuer', 'distributor' and 'financial products' under the PDDO laws.

    We set out below a high level (and general) summary of the definitions of each of these terms.

    • Issuer - an issuer includes persons who issue a financial product and must prepare a disclosure document under part 6D.2 or 7.9 of the Corporations Act.

    • Distributor - a distributor is taken to mean a 'regulated person' including AFS licensees, authorised representatives, credit licensees and credit representatives who engage in 'retail product distribution conduct'. Both 'regulated person' and 'retail product distribution conduct' are defined under the Corporations Act.

    • Financial product - the definition of financial product under the PDDO laws appears broader than what is typically understood to be a financial product from a financial services perspective. It includes:

      • products and securities requiring disclosure under parts 6D.2 or 7.9 of the Corporations Act - this may include securities, derivatives, interests in a managed investment scheme and debentures, stocks or bonds issued by a government, and superannuation products;

      • products that are not regulated under parts 6D.2 or 7.9 of the Corporations Act, but are within the scope of the ASIC Act (e.g. credit contracts and short-term credit facilities); and

      • other products prescribed by the Corporations Regulations 2001 (Cth).

      The following financial products are excluded from the PDDO: MySuper products, margin lending facilities, most ordinary shares, securities issued under an employee share scheme and other products prescribed by the Corporations Regulations.

    Please be mindful that the above summary simplifies the applicable definitions and each of the above definitions are multi-layered. Careful consideration will be required to determine whether you will be considered an issuer and/or distributor, and whether the product that you are issuing or distributing will considered a financial product, for the purposes of the PDDO laws. If you are unsure if the PDDO laws extend to you, you should seek independent professional advice.

  3. What must be done to comply with the PDDO laws?

    The obligations that must be adhered to under the PDDO laws will depend on whether you are considered an issuer, distributor, or both.

    We set out below a high level summary of some of the requirements that issuers and distributors must comply with under the PDDO laws:

    • Issuer
      • prepare a TMD for each of its financial products;
      • make the TMD publicly available;
      • take reasonable steps on relation to distribution;
      • review the TMD;
      • notify ASIC of 'significant dealings'; and
      • keep records.
    • Distributor
      • not to distribute unless a TMD has been made by the product issuer;
      • take reasonable steps that will, or are reasonably likely to, result in distribution being consistent with the most recent TMD;
      • notify the issuer of significant dealings; and
      • keep records.

    Issuers of financial products arguably have more stringent obligations under the PDDO laws in that they must prepare a TMD. The TMD must be published and made publicly available by 5 October 2021. Careful consideration will need to be given to the drafting of the TMD as there is a list of content requirements contained in section 994B of the Corporations Act that must be included in the TMD.

  4. Where can you seek further information and assistance?

    If you think you may be an issuer or a distributor (or both) of a financial product for the purposes of PDDO laws, you should seek independent professional advice in relation to your obligations under the PDDO laws and your compliance with those obligations as soon as possible. This is particularly important given the nature of the obligations that may be imposed and, if you are considered an issuer, the need to have a TMD published by 5 October 2021.

    ASIC has developed a useful guide to navigate the PDDO laws and how they may apply to you. That guide is available here.

    You may also contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Financial Services team.

More Cleardocs information on a range of topics

You can read earlier ClearLaw Articles on a range of topics, including the following topics which you may find useful:

Document packages that may interest you

[1] were enacted by the Treasury Laws Amendment (Design and Distributions Obligations and Product Intervention Powers) Act 2019 (Cth) and are now incorporated into part 7.8A of the Corporations Act 2001 (Cth).(section 994B)

 

Lawyer in Profile

Julian Smith
Julian Smith
Partner
PH: 61 3 9258 3734

Julian Smith is a partner in the Maddocks Commercial team.

Julian advises extensively in the following areas:

  • trusts law;
  • self managed super funds;
  • business and company sales and acquisitions; and
  • financial services law.

Julian advises clients ranging from public companies servicing the wholesale financial services market to high net worth individuals and their advisers.

Julian has been with Maddocks since undertaking articles in 2001.