Reasonable Steps Obligation – What does this mean for Platforms?

The consumer-centric Design and Distribution Obligations and Product Intervention Powers (DDO) regulation – with its deadline less than seven months away – is set to propel the Australian fund industry into more transparency, less complexity and higher standards of product governance.

As the name makes clear, the Act places obligations on the development and governance of financial products (Design), how and to whom those products are sold (Distribution), and, if that doesn’t remove the possibility of consumer detriment, the regulator has powers to stop potential or further harm (Product Intervention).

There are a number of obligations around product design and the disclosure of specific information that product issuers need to put in place in the very short time left.

And while the greatest requirements do fall on product issuers, product distributors are also in the firing line.

What does this mean for product distributors such as Platforms?

Platforms will not be permitted to sell, or make available, to retail customers any product for which there is no valid target market determination (TMD). They must be aware at all times of both the latest date by which a TMD must be reviewed and any triggers that could lead to an earlier review.

A Platform must monitor and remove a product if the expiry date has passed without a new TMD (with a new review date) being available.

As part of the “reasonable steps” obligations for Platforms, they will need to collect enough data on consumers to help them determine whether they fall within a product’s target market.

Platforms must also be able to feed back to the product issuers information about any sales to consumers outside the target market, as well as any other review triggers that could come through their channel, such as complaints or evidence of a large number of consumers selling their products long before the end of the required or recommended holding period, particularly if there is a penalty for doing so.

These feedback obligations are new to distributors and will require a whole new set of processes, not only to monitor for them but also to conduct the feedback efficiently and effectively.

By 5 October 2021, Platforms will need to identify, develop, and implement the necessary systems and processes to comply with this new legislation.

To prepare for the new regime, the changes Platforms that should consider fall into two areas:

• Structural changes, and
• Flow of information.
  

Structural changes

The obligations under DDO make no allowances for distributors not to have the necessary systems and procedures to collect and distribute the required information.

Structural changes within a Platform’s business may be needed to:

• Capture the necessary consumer information,
• Ensure that a TMD for each product is received and distribution conditions acted on,
• Put any filters in place to ensure products are only sold to the target market, and
• Be able to identify whenever a TMD is no longer valid.

Structural changes will need to concentrate on the following areas:

Validation

Platforms must put in place systems to quickly identify if products no longer have a valid TMD.

Should a product not have a valid TMD, it must be taken off the shelf until a new TMD has been produced and made publicly available.

Reasonable steps

Platforms are expected to take reasonable steps to distribute products to consumers that fall within their target market.

Platforms will therefore need to investigate whether they have sufficient information about the end consumer to determine whether they fall in or out of the target market.  If not, they need to take steps to collect and ingest the outstanding information into the sales process.

Flow of information

Platforms have never before needed to pass information about their end consumers or their distribution model to product issuers, but the DDO introduces a completely new regime of information sharing up and down the distribution chain.

Platforms need to consider not only how they receive information from the product issuers, but also how they send the necessary information back to them.

Periodic incoming information

It’s not just about the physical TMD.  Platforms and product issuers require a standardised way of sharing the TMD information in a format can be automatically ingested by the Platform.

It will not be feasible to manually share and extract the information on every product, so a machine-readable template will allow Platforms to automatically identify and label products as eligible for sale or not.

Periodic outgoing information

Platforms will need to collect and feed information back to the product issuer about any sales to consumers outside the specified target market, as well as any other factors that the issuers may determine to be review triggers which may come through their distribution channel.  These could include factors such as complaints or a large number of early surrenders of the product.

Event related information

If an event-related (i.e. unforeseeable) review trigger is alerted, issuers must have a quick and efficient way of sharing this information with all relevant Platforms, to ensure they stop selling the product until further notice.

How can FE fundinfo help?

FE fundinfo specialises in data collection, dissemination, and document creation.

At FE fundinfo, our solutions minimise manual intervention and the associated risks of disparate sources of data and separate vendors. We create user-friendly, scalable, and automated internal processes that collect and validate the data. The validated data is then checked against relevant triggers, efficiently disseminated, and displayed in documents that meet your branding requirements.

Our customisable fund document and data feed services give Platforms direct and efficient access via secure APIs to quality-controlled fund documents and data of their choice from a single, reliable source.

Speak to a Specialist