As the full suite of responsibilities advisers and licensees will take on under the new design and distribution obligations comes into view, the intent of the rules is being overshadowed by concern over the administrative overlay required and the apparent lack of benefit to consumers.
As one of six reforms to land in October, product issuers will need to publish target market determinations (TMDs) for their products while distributors (i.e., advisers and licensees) must take “reasonable steps” to ensure the clients receiving those products sit within the TMD.
Advisers are also obliged to regularly report back to issuers on the distribution of products, even if there is no hint of a breach of the obligations – something Encore Advisory CEO Tom Reddacliff believes amounts to needless administration.
“Most of my licensee clients are wondering why every six months they’re going back to something like 30 or 50 product providers and reporting back that there’s nothing to report,” he says.
“It’s the ultimate box ticking exercise that adds absolutely no value to the client,” Reddacliff continues. “Going back to report that there’s nothing to report is classic red tape and more unnecessary administration.”
According to ASIC’s regulatory guide, distributors need to keep product records and “ensure that this information flows back to the product issuers” within 10 business days of the “relevant reporting period”.
The reporting period itself is a matter of conjecture because each product issuer has their own interpretation of what information is required and how often they want to receive it, says Fortnum Private Wealth chief executive Neil Younger.
The relevant legislation – already embedded into section 994F of the Corporations Act – enables this ambiguity by stating the information should be “of a specified kind to the person that made the determination”.
“We’ve got 1,100 products with manufacturers taking different approaches to what they want reported,” Younger says. “Some are three months, some are six months. What does it do to de-risk the outcome for the client? It does nothing because nil reporting says nothing.”
Both Reddacliff and Younger agree with the intent of the D&D obligations, but there is a “mismatch” between the intent and the operation, Younger says.
“It’s not the rule itself, it’s moreso how it interplays with advice and the operation of the regulation,” Reddacliff notes.
Some of the burden can be minimised through clever exception reporting, Sean Graham from Assured Support says, but that doesn’t solve all the problems.
“Like most compliance, it should be on a complaints register so you just filter it out,” he says. “That would make it relatively easy to administer but it is still a burden and it does have risks.”
In its submission on the draft regulations, the Association of Financial Advisers expressed concern about the unnecessary cost involved in the record keeping and the “additional actions” required.
The regulatory impact statement estimated the cost to industry would be $239 million annually, the AFA noted, adding: “This is a very significant sum.”
Just a double up
Adding to the frustration on the AFSL side is that a lot of the requirements for advisers are already embedded as part of their best interests duty, which effectively doubles the requirement while adding an administrative overlay.
Treasury noted this is a revised explanatory amendment, stating: “the new regime excludes personal advice… [which] reflects that such conduct already involved consideration of the client’s individual circumstances… [however] conduct related to personal advice is subject to the record keeping and notification obligations to ensure the effective operation of those obligations.”
“So you’re obligated to take reasonable steps to check the TMD and assess suitability,” Younger says, “but because you’re providing personal advice if you still decide it’s appropriate you can rely on the personal advice carve out.
“It then becomes an admin burden on the adviser to check the TMD while they already have an obligation to check the TMD against best interest duty,” he adds. “It’s just a double up.”
Weirdly vulnerable advisers
A further concern is ambiguity around the term “significant dealings” in the legislation.
As per ASIC’s guide, distributors “must notify the issuer of a significant dealing in the product that is not consistent with the product’s TMD”.
But what exactly constitutes the trigger point for a mismatch becoming ‘significant’ is unclear.
It’s a point made by the AFA in its submission, and one ASIC also seems aware of.
“Consideration of whether a dealing is significant will likely differ between issuers and distributors,” the regulator states.
The effect, according to Graham, might be that advisers who are unsure about a TMD mismatch prefer to do nothing, especially if it means bringing extra scrutiny from ASIC to their own door.
“Advisers are weirdly vulnerable in all of this,” he says, noting that ASIC intends to publish breach and complaints data that may link to product issues and DDO failures. “It’s not clear yet whether advisers will also be included in those published.”
The bleeding edge
Simon Swanson, managing director of ClearView (which is both an issuer and distributor of products), notes that the D&D obligations were first conceived of several years ago.
By now, in an era when policy makers and regulators are trying to facilitate and support financial services as the sector nurses its way out of the pandemic, he questions whether they’re the right change at the right time – especially in their current format.
“Back 6 years ago, Australia used to be seen globally as the leading edge in financial services regulation, particularly as it relates to people,” he says. “In the last few years we’ve been seen as the bleeding edge of regulation.”
