Design & Distribution Obligations (DDO)
The Design and Distributions Obligations regulations came into effect for issuers and distributors of financial services on 5 October 2021.
This page has been created to:
Provide an overview of the DDO landscape and the obligations for those deemed to be Distributors of Philo MDA services
Provide access to Philo’s Target Market Determinations for its MDA services
Please note our disclaimer at the bottom of this page. Philo is not a legal firm and what follows is our current understanding of the new regime. As we are not legal advisers, it should not be relied upon and advisers and licensees should get their own professional advice.
Should you wish to talk to Philo about DDO related matters please contact Brett Sanders on 0438 071 094 or Toby Potter on 0414 443 236 respectively.
Philo client firms who missed Philo’s DDO webinar on 24 September 2021 can also request a link to the recording.
What are the Design & Distribution Obligations?
Under the DDO regime, Issuers must define the target market for their products in a way that helps consumers access the most relevant service for their needs. They do this by creating a Target Market Determination (“TMD”) for each product that sets out the sorts of consumer needs the product is designed to meet. The DDO regime applies to all sorts of financial products such as insurance, bank accounts, credit cards and managed funds and there is scope within the regulation for TMDs to reflect the nature of the product.
As an example, in the case of the TMDs created by Philo for its MDA portfolios, the needs addressed include:
the investor’s investment objectives,
what proportion of the client’s investable assets the MDA portfolio might be suitable for
the clients investment timeframe
the investors ability to bear risk and loss
the investor’s liquidity needs
Significantly, the TMD may also specify Distribution Conditions for a product, that they expect intermediaries to comply with. e.g. the product is only suitable for retail investors.
For intermediaries like financial advisers, where they are deemed to be Distributors of a relevant financial product they are obliged to have regard to the Target Market Determination for that product. As the regulation is new, there is still some uncertainty as to its application, but from what Philo understands of it, there is some detail advisers should be aware of:
The DDO regime applies to both advisers and licensees. We think it likely that that licensees will coordinate the meeting of certain obligations across advisers, but advisers need to be clear as to their individual accountability
The DDO regime does not replace existing adviser / licensee obligations - it is in addition to them. So for example, Best Interest Duty continues to apply and by our reckoning is a more onerous and meaningful obligation. This raises the question as to what incremental value DDO delivers in the context of advised clients. As yet, we cannot see what that value will be.
Perhaps due to the existing obligations on advisers, advising and subsequent dealing are excluded conduct under the regulation, but ASIC is on the record saying they still expect advisers to have regard to the content of the TMDs for the products they recommend. This means advisers need to read each TMD and be mindful of any inconsistency between the target market described therein and the needs of the client they are advising
In addition, the DDO regime includes obligations on advisers to record any Complaints relating to products used by their clients and inform the Issuers of those products of the nature and volume of complaints via a process and at a frequency nominated by each Issuer. The Issuers must in turn take those Complaints into consideration when reviewing their products. What constitutes a Complaint is very open. RG 271 refers to a definition drawn from an Australian standard: “An expression of dissatisfaction made to or about an organization, related to its products, services, staff or the handling of a complaint, where a response or resolution is explicitly or implicitly expected or legally required.”
Further, licensees and advisers must inform Issuers of any Significant Dealing in their services. The regulation does not closely define Significant Dealing, but it is thought to relate to material or significant distribution outside the target market and / or any dealing where the dealing is likely to cause harm. Whether a dealing is significant is a matter of judgement for the Distributor and would logically include consideration of the scale of Distribution outside the target market and the risk of harm to investors.
TMDs will set out the Issuers process for reporting Complaints and Significant Dealings
There are differing views in the legal community as to whether Managed Discretionary Accounts (MDAs) are covered by the DDO regime. For now, Philo has taken the conservative view that MDAs are covered.
Advisers seeking more information on the DDO regime should review Regulatory Guide 274 as a starting point.
How managed accounts assist advisers with their DDO compliance
Advisers are aware of the material benefits MDAs provide investors over traditional approaches to managing multi manager client portfolios. One of the benefits managed accounts now offer advisers is the greater simplicity they can bring to meeting DDO requirements.
Consider an investor with 20 managed funds in their portfolio, offered by say 18 different fund managers. An adviser that is employing the ‘traditional’ approach to managing client portfolios now has Complaints and Significant Dealing reporting obligations for each of the 18 fund managers and 20 products involved. Having to be aware of the contents of 20 TMDs, to be mindful of each when constructing portfolios (inclusive of Distribution Conditions) and then meeting the various reporting requirements of each Issuer is relatively onerous.
Contrast that with a different investor who also has a 20 fund portfolio, but accessed through a Philo MDA. In this instance the adviser is the Distributor of the MDA service and Philo is the Distributor of the underlying managed funds. The adviser only has to be familiar with, and report on, one ‘product’ being the MDA portfolio, whereas Philo (supported by the appointed portfolio manager) is the party that has to ensure TMDs are taken into account during portfolio construction and handles the reporting to each fund Issuer accordingly. The advisers DDO workload is reduced by close to 20 times.
Philo Target Market Determinations
The MDA portfolios offered through the Philo MDA service all correspond to one of the five Target Market Determinations on this page. To view the TMD simply click on the relevant box below. If you are an adviser wanting to understand how the TMDs below map to the MDA portfolios available to you, Philo has provided your business with a table setting out the relationships. Please see your practice manager or contact Philo for assistance. If you are an investor with a Philo MDA portfolio wanting to understand which TMD relates to your portfolio, please contact your adviser or email enquiries@philocapital.com.au.
Notifying Philo of Complaints or Significant Dealings
To notify Philo of Complaints or Significant Dealings, please complete the form below for each issue being notified and then hit the submit button. You will receive an acknowledgement email in response.
Disclaimer
This website page has been prepared and issued by Philo Capital Advisers Pty Ltd ABN 70 119 185 974 AFSL 301808 (Philo). It is copyright and must not be copied or distributed to any other person, either in whole or in part. If you are not the intended recipient, you must not use or disclose the information in this document in any way. This document is based on information believed to be accurate at time of preparation but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no ongoing obligation to correct or update the information.
The information in this document does not take account of your objectives, financial situation or needs or those of your client. Before acting on this information recipients should consider whether it is appropriate to their situation. You should obtain and consider the product disclosure statement (or other relevant disclosure document) relating to any product described in this document before deciding whether to acquire, continue to hold or dispose of that product. We recommend obtaining financial, legal and taxation advice before making any financial investment decision.
To the extent permitted by law, neither Philo nor any of its related entities accepts any responsibility for errors, omissions or misstatements of any nature, irrespective of how these may arise, nor will it be liable for any loss or damage suffered as a result of any reliance on the information included in this document.