ASIC chair Joe Longo and deputy chair Karen Chester.

ASIC has praised the intervention powers granted by the Design and Distribution Obligations regime, but five months on the regulator is still navigating how to best utilise it.

Introduced as one of six reforms last October, DDO had been criticised as a “box-ticking exercise” for advisers, but the corporate regulator defended the regime for the benefits it provided to the industry.

Speaking at a PJC enquiry on Friday, ASIC deputy chair Karen Chester described DDO as a “step change” which helped the corporate regulator to conduct analysis across products to find if they were being targeted to suitable consumers.

“It allows us to be a little more pro-active early on to identify where products might be getting to the wrong consumer cohorts,” Chester said. “As opposed to [a situation] where an entity goes into financial difficulties and then we’re dealing with compensation as opposed to getting consumers out of those poor products quickly.”

Under DDO, product issuers are required to make a publicly available target market determination (TMD) which identifies which consumers are the appropriate demographic for that product.

“We now have a line of sight – as do the journalists, parliament and consumer groups – to look at those TMDs when they have a concern about a product,” Chester said.

ASIC chair Joe Longo added the DDO regime “is very flexible” and designed to give the regulator power to intervene under its own discretion.

“These powers [DDO] will be tested and we are looking for opportunities to test them,” Longo said.

DDO also equipped the regulator with improved “step-in powers”, which Chester said gave ASIC greater bandwidth to intervene.

“The step-in powers mean if a TMD is entirely inappropriate, we have step-in rights to ask [those concerns] be addressed or the product not be distributed until it has been resolved,” Chester said.

“We’re in early days is working out how we will use this power because DDO has only been in play for five months now, but we’ve made it clear in the regulatory guidance what we will be looking to do here.”

Adviser concerns not addressed

Although happy to praise the product intervention powers, ASIC didn’t address the implications for advisers who breached the regime.

Part of the “box-ticking” concerns of DDO was the administration required to simply make sure there had been no breaches reported and the regulator gave no assurance over how strict it will utilise its powers against advisers.

“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,” Encore Advisory chief executive Tom Reddacliff told Professional Planner last September.

Another downside to DDO is that although it gave the regulator better powers to intervene, it doesn’t prevent investors from making poor asset allocation decisions.

In this respect, Longo said he was open to an improved system that would better warn consumers about high-risk investments, but ultimately the best solution was for Australians to pursue professional advice.

“The fundamental principle is Australians have the right to invest in registered management investment schemes,” Longo said.

“We should be encouraging – as ASIC does – people to get proper advice from licensed financial advisers before they enter into investments of this nature.”

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