Trustee Overview - Product Design And Distribution Obligations: ASIC Consultation Paper (CP) 325
This article provides a brief overview for superannuation trustees.
1. Background
Trustees need to ‘start their engines’ now to make sure that they will be compliant with the design and distribution obligations that will come into effect on 6 April 2021.
A project plan needs to be developed now that incorporates product and product governance audits. And that’s before the real work begins!
Even though these obligations do not come into effect for over 12 months, there will be significant effort involved in:
Ensuring that appropriate governance frameworks are in place;
Developing and documenting target market determinations; and
Understanding the interdependencies between these obligations and other new and emerging product obligations. For example, under the prudential framework for strengthening superannuation member outcomes and the Financial Accountability Regime.
ASIC released CP 325 on 19 December 2019. Comments on the paper must be made by 11 March 2020.
2. Application
The extent to which the design and distribution obligations impact a trustee depends on the products they offer. The obligations do not apply to:
MySuper products, even where insurance is offered as part of the product;
Defined benefit products; and
Products that have been closed to new members.
This means that you won’t need to prepare target market determinations (see below) for the above products
The obligations apply to financial product ‘issuers’ and ‘distributors’. The definition of distribution includes giving retail financial product advice, so the ‘distributor’ obligations will also generally apply to trustees.
3. Product governance framework
The product framework will need to cover the key stages of product design, product distribution, and monitoring and review.
We have previously written that trustees should be carrying out a holistic review of the processes and controls that govern the product lifecycle. We repeat that it seems to us that the governance arrangements for superannuation product management often don’t reflect the critical importance of this function and the emerging compliance and legal risks.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Royal Commission) identified a number of deficiencies with respect to Approved Deposit Taking Institutions’ management of their product responsibilities and the absence of clear end-to-end accountability for product management, which led to adverse customer experiences and outcomes.
As a result, on 22 January 2020 Treasury released a proposal paper about the extension of the Banking Executive Accountability Regime to all APRA regulated entities, to be known as the Financial Accountability Regime (FAR). As indicated above, there will be interdependencies between the FAR and the design and distribution obligations.
4. Issuers
a) Target market determinations
Trustees will need to make a target market determination for each financial product in respect of which they are required to issue a PDS. This is a written document that must be made publicly available.
Trustees will therefore need to identify relevant products and then they will need to critically assess whether they are consistent with the likely objectives, financial situation and needs of the intended target market.
ASIC is proposing to give guidance about how the target market determination will apply for products, such as superannuation. It is acknowledged that the application of these obligations to superannuation products is not straightforward. How for example, will trustees make a target market determination where the product includes both investment and insurance options that will be relevant for different types of members?
Trustees of funds with a more homogenous membership base may find it more straightforward to develop target market determination than those with a diverse membership base. For example, if the membership base is largely drawn from one industry (or even employer), members may have more demographic and socioeconomic characteristics in common such as age, superannuation account balance and ability to work beyond retirement age.
Trustees (as issuers and distributors) will also need to take reasonable steps to ensure that products are distributed in a manner that is consistent with the target market distribution.
b) Reviewing target market determinations
Trustees will need to periodically review the target market determinations and also in response to ‘triggers’. The triggers must be specified by the trustee and are events and circumstances that reasonably suggest that the determination is no longer appropriate.
ASIC will also need to be notified of any ‘significant dealing’ that is not consistent with the target market determination for a product.
c) Keeping records
Trustees must keep complete and accurate records of decisions made in relation to their target market determinations and associated reviews, together with the reasons for those decisions, for up to seven years.
5. Distributors
As distributors, trustees will not generally be allowed to distribute a financial product unless a target market determination has been made.
Trustees will also need to keep records of distribution information.
6. ASIC administration of design and distribution obligations
When ASIC is concerned that design and distribution obligations have been contravened it will be able to exercise a range of administrative powers including making a stop order.
If a consumer suffers loss or damage due to a breach of the design and distribution obligations, they can seek to recover that loss in court.
So…those engines should be started. It is important to be thinking about providing feedback to ASIC and starting the planning process to be ready for 6 April 2021.
Regards,
David
David Reckenberg – Managing Partner, QMV Legal
If your organisation needs assistance with superannuation law and compliance, QMV Legal can help.
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