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Dealing with design and distribution obligations


It’s a wonder that financial advisers have much time to actually provide advice to their clients in 2021. Following a whirlwind of regulatory changes, education requirements, platform outages and increased reporting, more time than ever is being spent on compliance.

  • The latest in the string of regulatory changes is the “Design and Distribution Obligations,” or DDO, set to be enforced from 5 October 2021. Passed in April 2019, the laws have great intentions, being to help consumers obtain products that meet their financial needs, objectives and situation.

    Ultimately, it requires product issuers to carefully consider the kind of consumers for which their products are appropriate, and how they are being marketed. However, as usual, the implications are more far-reaching than that, with advisers’ role as “distributors” resulting in another layer of reporting.

    There will be a number of key changes to the advice process, all focused on the provision of Target Market Determinations (TMD) for every single product, from managed funds, to superannuation accounts, managed accounts and exchange traded funds.

    Product issuers will be required to provide basic information, like the registration and objectives of the fund, with TMD disclosures as broad as “those seeking above-benchmark returns” or “those with an investment timeframe of X years.” They will also be required to show they have taken reasonable steps to ensure products are appropriately distributed.

    On a high level, it would appear an over-reach, suggesting TMDs and the regulator are the only ones who can determine the appropriate products for each person. However, financial advisers are able to use the “personal advice exemption,” which excludes them from a portion of the DDO requirements.

    Any adviser will know that while some products, like a geared equity strategy, may not be appropriate on their own as 100 per cent of a portfolio, they may be fine within a broadly diversified portfolio. This is the purpose of the exemption, with no requirement to show you have taken reasonable steps in recommending the product.

    But, as always with financial advice, it comes with a catch. Advisers will need to notify the product issuer, being the fund manager, how and why they are using the personal advice exemption at or around the time of making an investment. Specifically, advisers will be required to attest to the fact that the TMD had been considered, that personal advice was provided, and provide background on why it may have been recommended outside the TMD.

    This attestation will be required for every single product issuer an adviser deals with, from high-interest savings accounts to managed funds. In addition, several managers are already asking that advisers register with them and sign-off on their “terms of trade,” which include meeting the professional standards to be a financial advice. So, expect a great deal of paperwork to come as October nears.

    Of course, it doesn’t end there. Financial advisers will have reporting obligations to the product issuers they recommend. Advisers will be required to disclose any complaints about said products on a quarterly basis, and potentially “attest” to the fact that there had not been any, either. They will also be required to reporting any “significant dealings” outside of the TMD within ten days, which, with no legal definition, remains under a cloud of mystery.

    The changes only apply to the distribution of products to retail clients and while exchange-traded funds (ETFs) are included, their ASX-traded nature means issuers simply cannot track all of their investors.

    What is the likely result? It would seem that further growth in the use of ETFs is inevitable, as is the potential reduction in the number of funds or products used by advisers, if every different fund will require both annual and quarterly attestations. Similarly, we may also see an increase in the use of the “wholesale client” definition.

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