Design and distribution obligations - products caught (or excluded)

By Michael Mathieson
Banking Financial Services

In brief

Written by Senior Regulatory Counsel Michael Mathieson

Four and a half years after the FSI recommended a 'targeted and principles-based design and distribution obligation', the Design and Distribution Obligations and Product Intervention Powers Act 2019 (the Act) has recently received the Royal Asset. Although the design and distribution obligations will not commence for another two years, it is worth examining some of the financial products that will be caught (or excluded).

Credit facilities

In an eleventh hour change, the design and distribution obligations were extended to ASIC Act financial products issued to retail clients. This means the obligations will extend to most credit facilities. ASIC had long argued for credit facilities to be included and, in the end, its view prevailed.

However, the change was made with great haste and, apparently, not very much consideration. As such, the Revised Explanatory Memorandum states: 'the regime does not apply to products regulated under the Credit Act' – when precisely the opposite is true. Further, despite the late inclusion of credit facilities, the long-standing exclusion of margin lending facilities has survived. Consequently, we are left with the apparently anomalous outcome that a home loan will be subject to the obligations, but a margin loan will not.

Remember that margin loans (along with other credit facilities) were originally excluded on the basis that they are 'subject to specific rules' such as 'responsible lending provisions'. If the responsible lending provisions under the credit legislation were not, ultimately, enough to keep most credit facilities out of the regime, it is not clear why the responsible lending provisions under the Corporations Act were enough to keep margin lending facilities out of the regime.

Never mind. The legislation also gives ASIC the usual broad powers to effect exemptions and modifications, and so it is possible ASIC will declare that the exclusion of margin lending facilities is omitted.

Fully paid ordinary shares

Bear with me here. Some readers may gently suggest I should get over it, but I still trouble (a little, not a lot) over the exception for fully paid ordinary shares. I appreciate the EM says: 'Fully paid ordinary shares are excluded as they are fundamental to corporate fundraising'. I am not suggesting fully paid ordinary shares are not fundamental to corporate fundraising. However, home loans are fundamental to the banks and the issuing of home loans is fundamental to the economy. And yet, home loans have been included within the regime. I am probably missing a subtlety here and, unless a reader can enlighten me, I will remain a little troubled by the difference in outcome.

Basic deposit products

Basic deposit products are not included under the Act because they do not require a PDS. However, the EM says basic deposit products will be included in the regime by regulation. Now, you can think as much as the next person that the new regime is a good thing – but basic deposit products? How dangerous can they be? I look forward to seeing the terms of a target market determination for a basic deposit product. I suppose it is unlikely the associated distribution conditions will include a requirement that the acquirer first receive personal advice.

Interests in ERFs

This one made me chuckle. The EM says interests in ERFs will be excluded from the regime by regulation. As already noted, the regime does not commence for another two years. Let's see how many ERFs are still around in two years' time. But in the event that some of them are still battling on, it is good to know the design and distribution obligations will not apply to them.