A bill introduced to parliament recently could increase product awareness and suitability for retail clients, but has raised concerns about increased regulatory costs.
“The design and distribution obligations would force more structured and considered thought about how the interests of consumers are being met,” Jonathan Steffanoni, Principal Consultant at consultancy firm QMV says. “It is likely to require an uplift in the ongoing monitoring of the objectives, situation and needs of choice members.”
The design and distribution obligations and product intervention powers amendment bill seeks to ensure “a customer-centric approach to designing, marketing and distributing financial products”, as well as enhancing the ASIC’s enforcement and disciplinary powers and enabling victims of mis-sold products to seek damages.
The nexus of the proposed bill is the requirement for the product “offerer” to produce a publicly available “target market determination”, which must then be checked for consistency, records and complaints by the distributor.
This would mean that providers of financial services products would need to assess, record, make available and periodically review exactly who the intended client is.
Distributors would then need to notify the Australian Securities and Investment Commission if dealings in the product are not consistent with the target market determination.
“The reforms intend to address the problem of retail financial products being either designed or sold with something other than the objectives, situation, and needs of a target market (or consumer) in mind,” Steffanoni explains.
“A typical example of this could be designing or selling a product with high fees – and levels of service to a target market which is unlikely to want or need the high levels of service,” he continues. “This could take the form of a complex superannuation product with high levels of investment flexibility designed or distributed to a group with low levels of financial literacy.”
In their submission to the initial draft bill, the Financial Planning Association flagged the cost of this new regulation, and questioned whether it was a worthwhile development.
“We a deeply concerned about the compliance costs of a new layer of regulation of financial advice,” the submission read. “We implore Treasury to assess the effects of recent and imminent reforms of the regulation of the financial planning sector, before imposing an additional layer of compliance the cost of which may significantly outweigh the benefit (if any).”
The Association of Financial Advisers also reeled at the Regulatory Statement’s cost impact estimate of an annual $239 million dollars, saying that it was “a very significant sum”, and that it will “come on top of a number of other recent regulatory driven increases which will impact upon the cost of providing advice to Australian consumers “.
According to Steffanoni, the cost is likely to b passed onto clients.
“There will be some [increased cost],” he says. “it is likely to be worn at least in part by consumers by way of fees, but the real question is whether the benefits outweigh the costs.”