CREDIT WHERE CREDIT IS DUE – YOUR DESIGN AND DISTRIBUTION OBLIGATIONS.

The Design and Distribution Obligations (DDO) have received a lot of attention lately, but did you know that they apply to credit products? Different obligations apply depending on whether you’re a product issuer or product distributor.

When do the DDO apply?

The DDO were due to commence on 5 April 2020 but they’ve been deferred to 5 October 2021 due to COVID-19.

What products are covered?

Product issuers and product distributors will be required to design and distribute products that are:

• Fit for purpose; and
• Deliver good consumer outcomes.

DDO apply to:

• Credit products such as credit contracts, consumer leases, credit cards, home loans and funeral expenses policies;
• Credit facilities under the ASIC Act. This is broader than credit under the National Credit Act. For example, short-term credit is exempt under the National Credit Act but captured under the ASIC Act; and
• Mortgages, guarantees or consumer leases regardless of whether they’re regulated by the National Consumer Credit Protection Act. For example, this includes buy-now-pay-later credit contracts.

Who is covered?

DDO apply to:

• Product issuers: These are the issuers of the product and could include consumer credit providers and consumer lessors;
• Product distributors: These are people who engage in ‘retail product distribution conduct’. This covers anyone who gives a disclosure document or provides financial product advice to a retail client. This means aggregators, the people who exist between mortgage brokers and lenders, wouldn’t be considered to be product distributors;
• Issuer-Distributors: A credit provider or lessor who distributes directly to consumers must comply with the obligations imposed on both issuers and distributors; and
• Intermediaries: This can include a number of people, like credit assistance providers, who take part in the process of securing credit for a consumer under a consumer contract or consumer lease. They do this by preparing or passing on information at the request of the consumer or another intermediary. An intermediary would be treated like a product distributor.

The obligations of a product issuer

Product issuers must make a target market determination (TMD). This involves developing a written statement that includes:

• The class (or demographic) of customers that the product or service is appropriate for and targeted at. A product is ‘appropriate’ if it’s reasonable to conclude that it would generally meet the likely objectives, financial situations and needs of the customers in the target market;
• Any conditions or restrictions on dealing in the product that would reasonably suggest that the TMD isn’t appropriate for the target market. This should include what events or circumstances may suggest this and the information that the issuer needs to determine that a product is no longer appropriate for the target market. If a product is no longer appropriate for the target audience, the issuer must stop distributing or selling it within 10 business days unless they’ve reviewed or updated the TMD;
• The period in which the TMD will be reviewed; and
• When the distributor should provide the issuer with complaints information about the product.

The issuers must:

• Make the TMD available to the public free of charge before the product is offered;
• Take reasonable steps to ensure distribution is consistent with the TMD;
• Notify ASIC of significant dealings which are inconsistent with the TMD; and
• Keep records of decisions made about complying with these obligations.

The obligations of a product distributor

A product distributor must not distribute a product without a TMD. They must also take ‘reasonable steps’ to ensure the product is distributed in a way that is consistent with the TMD. This includes considering:

• The likelihood of any conduct being inconsistent with the TMD;
• The nature and degree of harm that might result to consumers from the sale of a product that is inconsistent with the TMD;
• How to eliminate or minimise the likelihood of harm when they know or ought to know that the product is inconsistent with the TMD; and
• The availability and suitability of ways to eliminate or minimise the likelihood of harm.

A product distributor must also:

• Keep records that the issuer requires (including complaints information);
• Provide these records to the issuer within a certain timeframe; and
• Notify the issuer of any significant dealings in the product that are not consistent with its TMD.

This is a complicated area. If you need help drafting a TMD or reviewing your distribution channels, get in touch. We’d be happy to help.

Jaime Lumsden

September 2020