The design and distribution obligations scheduled to take effect in April, 2021 will be a win for product providers and consumer alike, according to industry pundits, with both benefiting from more targeted and appropriate distribution models.
The new legislation, which deems that providers like fund managers and banks must make and disclose target market determinations for their products, is notable in that it employs the terminology of marketing theory to achieve consumer protection, according to QMV consultant Jonathan Steffanoni.
“Marketing is an approach to business which seeks to supply products to satisfy market or consumer needs rather than pushing products on markets which don’t really have a need for them,” Steffanoni says.
This means there is less potential for consumers to be exploited, he explains.
“It’s a consumer-first approach that has similarities with older legal concepts such as fiduciary duties and unconscionable conduct, which prioritise the best interests of a consumer in arrangements where information asymmetry can place consumers in a position of disadvantage,” he states.
The new obligations will force product issuers to identify a group of consumers based on what Steffanoni calls “measurable attributes”, such as age, level of income, level of engagement and amount of investment. They must then take reasonable steps to ensure distribution is targeted to this group.
He gives the example of a superannuation fund with a cash option geared towards clients with an investment horizon of less than five years. “The distribution conditions would be likely to prohibit activities to promote or distribute this product to younger members with investment horizons will in excess of five years,” he says.
While clients will benefit from being sold fit-for-purpose products, providers who can nail profiling and analytics will also do well because they will stay on top of their target markets, Steffanoni continues. “The further development of the API Ecosystem and Consumer Data Right may provide product issuers with a much richer data set on which to rely on to understand the needs of their clients and members,” he adds.
While the new obligations aren’t technically in effect until April 2021, the Australian Securities and Investments Commission has already been granted powers to enforce the new arrangements if it determines that a financial product presents a risk of significant detriment to retail clients.
According to Steffanoni, this could mean ASIC places certain conditions on the product issuer such as requiring the retail client receives financial advice before the product is issued to them.
“There are prescribed factors and a process [for] how ASIC must arrive at such a determination, however the reforms do provide ASIC with some discretion on what would constitute significant detriment,” Steffanoni says.
“This power operates independently to the design and distribution obligations, and would enable ASIC to proactively intervene to protect consumers,” he adds.
Not ‘rocket science’
According to one product provider, the new laws will amount to “clarity and consistency” for consumers.
Stuart Fechner, director of retail research and relationships at Bennelong Funds Management, says the D & D obligations align with what he calls the notion of “funds for a purpose”. That is, what does the fund do and who is it suitable for?
“It doesn’t sound like rocket science, but obviously we’re still trying to work it out as an industry, which is a good thing,” Fechner says. “The easier we can make our funds and the terminology around them to understand, the better.”