ob体育 today initiated consultation on draft guidance for the new financial product design and distribution obligations. The new obligations come into effect in April 2021.听
The obligations require听financial product firms to develop products that meet the needs of the consumers in their intended target market.
Announcing the consultation, ob体育 Deputy Chair Karen Chester said, 鈥楾he obligations should drive better business and consumer outcomes. They simply require business to design products that meet genuine consumer needs and use distribution channels that will likely get them to the right consumers鈥�.
The obligations also address the causes of much of the misconduct examined by the Royal Commission.
鈥楳ost of the Royal Commission case studies 鈥� from the misselling of products to extremely poor value financial products 鈥� would have uniformly failed these obligations. The implementation of this听 reform听 presents a听 significant opportunity for industry to demonstrate they have embedded a consumer-centric approach in their business and are better managing non-financial risks鈥�, Ms Chester said.
ob体育鈥檚 proposed approach to the guidance is outlined in Consultation Paper 325 Design and Distribution Obligations (CP 325). Consistent with the legislation and international practice, the draft guidance is principles-based but also incorporates working examples. This approach reflects Parliamentary intent that firms are best placed to apply the regime in the circumstances of their product offerings and distribution processes. Our approach also reflects the obligations are focussed on taking 鈥榬easonable steps鈥� and apply broadly across the financial services industry.
Ms Chester said, 鈥楾he design and distribution obligations reinforce fundamental business considerations for firms, their boards and ultimately their shareholders. What are the target markets for our financial products?听 Do our financial products meet the genuine needs of our consumers?听 Do our distribution channels mean our products will likely get to the right consumers?鈥�.
The legislation has provided a two year transition period for industry to meet the new design and distribution obligations.
鈥楾he two year transition period recognises that, whilst the obligations are not onerous, it may take time for some firms to implement them. Firms that already have good product governance regimes听 in place will readily adapt to the new obligations鈥�, Ms Chester said.
The design and distribution obligations bring Australia into line with comparable jurisdictions, including the United Kingdom, Netherlands and European Union, where similar product governance regimes are already in place. ob体育 has engaged with European regulators in developing its draft guidance.
The Financial System Inquiry (FSI) and Financial Services Royal Commission outlined the limitations of disclosure in delivering good consumer outcomes. The FSI recommended the introduction of the product design and distribution obligations in recognition of these limitations.
ob体育 seeks public input on the design and distribution obligations consultation documents by Wednesday 11 March 2020.
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Background
ob体育 welcomed the Government鈥檚 decision to implement this FSI recommendation and the passage of legislation introducing the design and distribution obligations in April 2019 (refer: 19-079MR). The obligations were legislated at the same time as ob体育鈥檚 product intervention power.
The design and distribution obligations comprise two primary limbs. First, the design requirement for product issuers to carefully consider the kind of consumers that their products are likely to be appropriate for, and to design and refine their products with this target market in mind. Second, the distribution requirement for product issuers and their distributors to take reasonable steps to distribute to consumers in the target market.
The obligations are not set-and-forget. They will require firms to consider the outcomes of their products in the market, identify where inappropriate sales are occurring and refine their products and systems.
The consultation covers ob体育鈥檚 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
- ob体育鈥檚 proposed approach to administering the obligations.听