Consumer trust isn’t something to be taken for granted, but reports from the UK, US and here at home are all pointing towards an uplift in trust levels around financial advice, which can only be a welcome development.
There are significant tailwinds behind the financial advice industry at the moment, but some major obstacles are still preventing advice practices from taking advantage of surging demand according to a new study from CFS.
ASIC sounds the alarm on third-party product distribution
The corporate regulator has third-party product distributors in its crosshairs after a new report highlighted the “limited” ability of providers to assess and monitor how good hired distributors are at selling products in accordance with the design and distribution obligations.
Third-party product distributors are often brought on by product providers to handle or broaden the sales function of a product provider. Fund managers, for example, often use them to help with selling across the retail and wholesale financial advice market, as well as through institutional channels.
ASIC’s concern is that adding an extra distribution layer adds a layer of risk from a compliance perspective – especially in the context of the D&D laws, which were introduced in October 2021 to ensure issuers were taking a “consumer centric approach” and selling appropriate products to their target market.
“We observed that some issuers who were using third-party distributors did not require third parties to take the same approach to distribution as they were taking to directly distribute their products to consumers,” ASIC said this week, after releasing a report into ongoing compliance with the D&D obligations [Report 795].
It’s not that the regulator has a problem with third party distribution per se, but ASIC said a recent review [Report 795: Design and distribution obligations: Compliance with the reasonable steps obligation] showed that while issuers have made progress in their compliance with the D&D obligations, it observed “limited due diligence arrangements to assess and monitor third-party distributors’ ability to distribute a product in accordance with the TMD [Target Market Determination]”.
“We observed that some issuers who were using third-party distributors did not require third parties to take the same approach to distribution as they were taking to directly distribute their products to consumers.”
It also noted other areas of required improvements, including online marketing, poor quality questionnaires and limited monitoring of consumer outcomes.
But the focus on third party distribution was the top-line issue for the regulator, which urged providers (or “issuers”) to consider whether they need to amend practices for the “selection and supervision of distributors”.
Providers need to make sure that a third-party distributor has the capacity to sell a product at its own compliance standards, ASIC said, which includes sticking to the TMD as set out by the provider. That TMD, which should describe the type of customers a product has been designed for, as well as their likely financial objectives and needs, is just as applicable to the third-party distributor as it is to the provider.
The provider is then responsible for making sure the distributor adheres to the standards set out for them.
“Issuers should have adequate arrangements in place to monitor distributors,” the report stated. “Asking a distributor to self-certify that they are complying with the design and distribution obligations is unlikely to be adequate supervision of a distributor.”
Providers are often only conducting scant due-diligence on third-party distribution teams, the regulator believes. This might include “basic characteristics” such as making sure they hold a valid AFS license, are solvent and none of the directors have been banned.
“We found there was limited consideration of the distributors’ actual capacity to comply with the design and distribution obligations and distribute a product in accordance with the TMD,” ASIC continued. “This may be inadequate, particularly for a product with a narrow target market. Issuers should ensure that a distributor has the capacity to distribute a product in accordance with the TMD.
As it stands, the D&D obligations do not require providers to set out formal arrangements with third-party distributors, yet ASIC would like to see them. Calling them “better practices”, ASIC said providers who had formal arrangements were able to insert clauses requiring distributors to take steps to ensure “distribution conduct” was consistent with TMDs, and also ensured they retained the right to conduct regular monitoring and reviews.
According to ASIC commissioner Alan Kirkland, providers need to take note of its concerns about the disconnect between their own compliance practices and those of third-party distributors they partner with.
“Where there are opportunities to improve, we expect product issuers and distributors to reflect on the report’s findings and improve their distribution practices,” Kirkland said.
