FAQs: Design and distribution obligations for advice licensees and financial advisers

The design and distribution obligations apply to issuers and distributors of financial products who engage in retail product distribution conduct.

Advice licensees and financial advisers are considered ‘distributors’ under the obligations when providing financial product advice.

The main obligations under the regime are summarised in Table 1.

Table 1: Overview of the design and distribution obligations

While advice licensees and financial advisers are exempt from meeting the reasonable steps obligation when providing personal advice, they still have obligations relating to reporting and record keeping. See Questions 5–11 for information on how the design and distribution obligations apply when providing personal advice.

The design and distribution obligations are not intended to operate as an individual product suitability test like personal financial advice. Rather, the obligations require issuers to:

• consider the class of consumers that their product is likely appropriate for, taking into account their likely objectives, financial situation and needs (as a class), and
• take steps to ensure that products are distributed to that class of consumers.

Issuers or ‘sellers’ of a financial product are persons who:

• are required to prepare a regulated disclosure document, such as a Product Disclosure Statement (PDS), for the offer of a financial product (e.g. a responsible entity of a managed investment scheme, an insurer and a superannuation trustee)
• issue or sell a regulated product under Division 2 of Part 2 of the Australian Securities and Investments Commission Act 2001 (e.g. an issuer of a funeral expenses policy or credit card provider), or
• are required by the Corporations Regulations 2001 (Corporations Regulations) to make a TMD (e.g. persons who offer or issue basic banking products).

Distributors are regulated persons, as defined under section 994A(1), who engage in retail product distribution conduct. The definition of ‘regulated person’ is wide and includes:

• AFS licensees, and
• authorised representatives (see RG 274.27).

This means that both licensees and authorised representatives have obligations under the regime. However, the licensee is ultimately responsible for the conduct of their authorised representatives.

Distributors that engage in ‘retail product distribution conduct’ must meet the distribution obligations under the regime. ‘Retail product distribution conduct’ includes:

• dealing in a product in relation to a retail client
• giving a PDS for the product to a retail client, and
• providing financial product advice (both general and personal) in relation to the product to a retail client.

For advice licensees and financial advisers, ‘retail product distribution conduct’ will generally occur at the time when the financial product advice is provided to the client.

For more information, see Figure 1 of RG 274 and RG 274.25–RG 274.31.

The target market determination (TMD) is a written document that describes the class of consumers comprising the target market for a product. The TMD also sets out matters that are relevant to the product’s distribution and review.

The issuer must ensure that the TMD meets several content requirements, including but not limited to specifying conditions and restrictions on the distribution of a product and specifying the kinds of information that a distributor must report to the issuer: see section 994B(5). For more information, see Table 1 of RG 274 and RG 274.10–RG 274.11.

A broad range of financial products are covered by the design and distribution obligations.

For the purposes of the obligations, a ‘financial product’ is defined under sections 994AA and 994B(1) to include:

• products that need a PDS (e.g. interests in a managed investment scheme, insurance and superannuation products)
• certain securities that need a disclosure document under Part 6D.2, but not ordinary shares (e.g. securities with an investment purpose, such as listed investment companies, listed investment trusts, hybrid securities and real estate investment trusts)
• credit contracts (e.g. credit cards, home loans, funeral expense policies), and
• other products prescribed by the Corporation Regulations (including but not limited to investor directed portfolio services and exchange traded products).

Note: The design and distribution obligations apply at the financial product level. For example, in the case of an investor directed portfolio service (also known as a ‘platform’), the obligations apply to both the issuer (or operator) of the platform and issuers of the underlying products offered on the platform.

Some products are not subject to the design and distribution obligations (e.g. MySuper products, margin lending facilities and securities issued under an employee share scheme): see section 994B(3).

For more information, see Figure 1 of RG 274 and RG 274.20–RG 274.24.

As outlined in Table 1, issuers and distributors of a financial product must comply with the reasonable steps obligation – that is, they must take reasonable steps to ensure that a product is distributed consistently with the TMD.

However, advice licensees and financial advisers are exempt from meeting the reasonable steps obligation when providing personal advice.

It is important to understand that the exemption from the reasonable steps obligation applies to personal advice only. If advice licensees and financial advisers give general advice to a client, or provide execution only services to a retail client, they will need to meet the broader requirements of the design and distribution obligations, including the reasonable steps obligation: see RG 274.31 and RG 274.201–RG 274.204.

Whether providing personal or general advice, advice licensees and financial advisers need to comply with obligations relating to reporting and record keeping.

Advice licensees and financial advisers are required to report to issuers:

• if they receive a complaint, how many complaints they have received during a reporting period (see Question 7)
• any other information that the issuer specifies in the TMD to assist the issuer to determine whether an event or circumstance has occurred that would reasonably suggest that the TMD is no longer appropriate (see Question 8), and
• when they become aware of a significant dealing in the product that is not consistent with the TMD (see Question 9).

Financial advisers must also keep records about the above distribution information in relation to products for up to seven years: see Question 10.

Lastly, while advice licensees and financial advisers providing personal advice are exempt from taking reasonable steps to ensure products are distributed consistently with the TMD, we expect them to consider the TMD as part of meeting their best interests duty in the same way they would consider other sources of research or information about a financial product.

This is because the TMD will contain important information about the product and the class of consumers the issuer considers the product is likely appropriate for: see RG 274.203.

As discussed in Question 5, the exemption from the reasonable steps obligation applies when personal advice is provided because, in these circumstances, the adviser is providing advice tailored to the consumer’s individual circumstances. This advice is provided in accordance with the existing best interests duty and related obligations in the Corporations Act.

However, if advice licensees or financial advisers are providing general advice, or providing execution-only services to a retail client, they will need to meet the broader requirements of the design and distribution obligations, including the reasonable steps obligation.

This is because, in these circumstances, the advice is not tailored to the individual circumstances of the client and the adviser must consider whether the client falls within the class of consumers that the issuer has identified in the TMD.

During the reporting period, where advice licensees and financial advisers have engaged in retail product distribution conduct in relation to the product, they must report complaints information to the issuer.

Specifically, advice licensees and financial advisers must report:

• if they have received complaints in relation to the product during the reporting period, and
• if so, the number of complaints that they have received during the reporting period: see section 994F(4).

Advice licensees and financial advisers are not required to report to issuers if they have not received any complaints during the reporting period.

Note: The ASIC Corporations (Design and Distribution Obligations Interim Measures) Instrument 2021/784 relieves distributors of the requirement to report to issuers whether a complaint has been received, including where nil complaints are received. However, if distributors receive complaints during the reporting period, they are still required to report to issuers the number of complaints they receive. This is in line with the Government’s intended operation of the legislation as set out in a public statement titled ‘Updated amendments to the design and distribution obligations’.

A complaint in relation to a financial product is defined under section 994A as a ‘complaint made to a regulated person about the product, which is covered by a dispute resolution system’. The dispute resolution system must comply with section 912A(2) – that is, the licensee must have an internal dispute resolution system that meets the requirements set out in Regulatory Guide 271 Internal dispute resolution (RG 271) and must be a member of the Australian Financial Complaints Authority.

In the TMD, the issuer will specify the reporting period for the product (e.g. quarterly). The information about complaints must be reported as soon as practicable and, in any case, no later than 10 business days after the end of the reporting period: see section 994F(4).

An issuer may request that advice licensees and financial advisers provide other information in relation to complaints as part of the information specified to be reported in the TMD: see Question 8. For more information, see RG 274.117–RG 274.119.

An issuer may specify in the TMD other information that distributors, including advice licensees and financial advisers, must report to an issuer if they have engaged in retail product distribution conduct in relation to the product during a reporting period.

In setting out the types of information that must be provided, the issuer will need to consider what information (in addition to the information that the issuer can directly obtain from other sources) is needed to ensure the issuer can promptly identify whether an event or circumstance has occurred that would reasonably suggest that the TMD for a product is no longer appropriate. Issuers should only collect information from distributors that is relevant and necessary for this purpose.

For example, as discussed in Question 7, one type of information an issuer may request is further information on complaints received in relation to the product. This could include the nature or substance of the complaint.

The issuer will also set out in the TMD a reporting period for this information to be provided. The information must be provided to the issuer as soon as practicable and, in any case, no later than 10 business days after the end of the reporting period: see section 994F(5).

For more information, see RG 274.113–RG 274.116 and RG 274.217–RG 274.220.

The ‘significant dealing’ obligation requires advice licensees and financial advisers to report when they become aware of a significant dealing that is not consistent with the TMD. This will likely mean that advice licensees and financial advisers will be reporting a number of their own dealings that are not consistent with the product’s TMD: see RG 274.215.

‘Significant’ is not defined in the Corporations Act and whether or not a dealing is significant will need to be determined in the circumstances of each case. For example, the extent to which a client’s circumstances differ from the class of consumers that the issuer has identified for their product may be relevant as to whether a dealing is significant: see RG 274.160.

To assist advice licensees and financial advisers in identifying these dealings, an issuer may set out the kinds of dealings they consider significant, and therefore reportable, in the TMD.

Where an issuer has not specified the kinds of dealings they consider significant, advice licensees and financial advisers will need to consider whether or not a dealing is significant in the circumstances.

As noted in RG 274.214, the obligation to notify the issuer of a significant dealing is intended to help the issuer make timely and appropriate decisions (e.g. a decision to review a TMD) and to meet the issuer’s obligation to report significant dealings to ASIC. Advice licensees and financial advisers should consider this purpose in determining whether a dealing is significant and ought to be reported to the issuer.

Advice licensees and financial advisers should also consider other factors, including, for example, the following factors set out in RG 274.160 (where relevant):

• of those consumers who acquire the product, the proportion of consumers who are not in the target market, including the proportion of consumers acquiring the product who are part of a class that has been excluded from the target market
• the actual or potential harm to consumers, including the amount of any financial loss, resulting from consumers who are not in the target market acquiring the product
• the nature and extent of the inconsistency of distribution with the TMD (noting that distribution to a consumer can be either more or less consistent with a target market along a continuous spectrum)
• the proportion of gross income or premium obtained for the product from consumers acquiring the product who are not in the target market, and
• the time period in which these acquisitions outside the target market occurred.

Where applicable, advice licensees may set out information about the dealings that financial advisers should report.

When advice licensees and financial advisers become aware of a significant dealing, they must report to the issuer within 10 business days, or as soon as practicable, after becoming aware of the significant dealing: see section 994F(6).

All distributors, including advice licensees and financial advisers, must collect and maintain complete and accurate records of ‘distribution information’: see section 994F(2)–(6). This information must be kept for up to seven years.

This information includes:

• the number of complaints that they receive in relation to the product
• any information specified in a TMD that they are required to report to the issuer, and
• the dates on which they have reported the following information to an issuer and the substance of that information:
• the number of complaints they have received during a specified reporting period
• other information they must report according to the TMD, and
• any significant dealings in the product.

ASIC may request records from advice licensees and financial advisers to monitor compliance with the law. Good record keeping is likely to assist in demonstrating that advice licensees and financial advisers have taken the necessary steps to comply with the obligations.

For more information, see RG 274.221–RG 274.224.

To facilitate the implementation of personal advice, the design and distribution obligations provide an exemption for distributors who are not associated with the advice licensee or financial adviser from the reasonable steps obligation if the retail product distribution conduct is necessary to implement personal advice.

For the retail product distribution conduct to be necessary to implement personal advice, the distributor needs to be satisfied that:

• the client has received personal advice in relation to the product
• the personal advice remains current, and
• the issuer’s conduct would be consistent with the advice as it relates to the particular product they would be distributing: see the Revised Explanatory Memorandum to the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019 at paragraph 1.105.

Note: When considering whether advice remains current, the distributor should consider industry practice as set out in Statements of Advice (e.g. 30 to 45 days).

ASIC does not expect distributors who are not associated with the advice licensee or financial adviser to review advice provided to the consumer. The distributor may rely on the adviser’s confirmation in relation to these circumstances – that is, that the client has received personal advice in relation to the product and that the personal advice remains current: see RG 274.205–RG 274.207.

For example, this may mean that the distributor will confirm these details in an application form or online portal when advice licensees and financial advisers are arranging a product on behalf of a consumer, similar to existing mechanisms for confirming that a PDS has been provided.