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Design and distribution obligations for advice licensees and financial adviser

Updated: Nov 23, 2021

The design and distribution obligations apply to issuers and distributors of financial products who engage in retail product distribution conduct.

The new legislation imposes obligations on issuers (designers) and distributors of financial products to incorporate product governance frameworks to ensure that there are clear target market determinations (TMD’s).

The objective is to strengthen product issuer and distributor accountability so that there are fewer complaints from consumers purchasing products that do not match their needs, says Chris Renouf. He further contends that Licensees must ensure that their product design, marketing collateral, and distribution practises all comply.

Mr Adrian Edwards of AD Edwards Legal & Compliance Solicitors further explains that the new design and distribution regime generally applies to a financial product if a disclosure document in the form of a PDS must be prepared for it. Under Subdivision C of Division 2 of Part 7.9 of the Corporations Act, a PDS has to be prepared where one is required to be given under Subdivision B of the same division and part of the Act. In particular, sections 1012A and 1012B provide that a PDS must be given whenever a regulated person recommends or issues a financial product to a retail client. [Schedule 1, item 5, paragraph 994B(1)(b) of the Corporations Act]

A regulated person does not generally need to give a PDS in relation to a sale of a financial product. A sale occurs when a financial product is sold by, or purchased from, a person who acquired the product at or after its issue. However, section 1012C requires a PDS to be given in sale situations which could otherwise be used to avoid the requirement to give a PDS. These situations include off-market sales where the seller controls the issuer; sales amounting to an indirect issue; and indirect off-market sales where the seller controls the issuer. The term ‘regulated sale’ is used to describe these sale situations in the new regime. [Schedule 1, item 5, section 994A, paragraph 994B(1)(b) of the Corporations Act]

Nonetheless, some financial products requiring a PDS are not subject to the new design and distribution regime: MySuper products and margin lending facilities. These products are currently subject to product-specific regulations aimed at ensuring that firms provide appropriate products to consumers. MySuper products are subject to special rules under the Superannuation Industry (Supervision) Act 1993. Similarly, margin lending facilities are subject to Division 4A (special provisions relating to margin lending facilities) of Part 7.8 of the Corporations Act. [Schedule 1, item 5, subsection 994B(3) of the Corporations Act]

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