Design and distribution obligations for investment products – ASIC's latest expectations

By Simun Soljo, Ally Crowther, George Cramer
ASIC Financial Services

Good practices and recommendations for improvement 7 min read

ASIC has released Report 762 (the Report) following its recent review into how investment product issuers are complying with the Design and Distribution Obligations (DDO) regime. The Report summarises ASIC's findings and highlights areas for improvement.

Key takeaways

  • ASIC has undertaken a review of compliance with the DDO regime by issuers of investment products.
  • ASIC continues to take regulatory action against issuers it believes have failed to meet the requirements of the DDO regime and notes that ASIC has issued 26 interim stop orders and commenced two civil penalty proceedings.
  • ASIC has said that interim stop orders have become its 'go-to regulatory tool' for quickly disrupting and stemming poor consumer outcomes and we will likely see it continue to use interim stop orders as a first step in taking enforcement action.
  • ASIC has provided updated guidance in the Report about what issuers need to do to comply with the DDO regime – including in relation to product design, formulating the content of Target Market Determinations (TMDs), compliance with the 'reasonable steps' obligations including considering distribution arrangements, and monitoring and review of TMDs.
  • Product issuers and distributors should consider ASIC's comments in the Report, and should review their TMDs and distribution practices in light of the additional guidance provided.
  • ASIC has flagged that it plans to carry out surveillance work that focuses on compliance by issuers and distributors with the 'reasonable steps' obligation and will consider regulatory action where necessary.

Summary of the Review

ASIC undertook a review of compliance with the DDO regime by issuers of investment products, which include interests in managed investment schemes, shares issued by investment companies, preference shares and debentures. These products are prioritised because of concerns that investors were being inappropriately exposed to high-risk products. ASIC reviewed the appropriateness of investment product TMDs, taking into account the risk, performance and other attributes of the products and the guidance in its Regulatory Guide 274 Product design and distribution obligations (RG 274). In addition, for issuers of managed investment schemes, it reviewed the approach taken to product design (including the process undertaken to prepare a TMD), the adequacy of distribution arrangements (including whether issuers are complying with the 'reasonable steps' obligation), and considered issuers’ TMD review and monitoring arrangements.

Overall, ASIC found there is 'considerable room for improvement'.

In many instances, ASIC considered that the target market for investment products was defined too broadly and that TMDs used inappropriate risk profiles, levels of portfolio allocation and investment timeframes in relation to the identified target market. ASIC also found in a number of cases that the distribution conditions were inappropriate or non-existent, and has warned against consumer self-certification as a distribution condition (ie, requiring the consumer to determine whether they are in the target market based on their own understanding of the TMD).

In its media release accompanying the Report, ASIC said that interim stop orders, which prevent issuers from offering, issuing, selling or transferring their product while the order is in force, have become its 'go-to regulatory tool' for quickly disrupting and stemming poor consumer outcomes. ASIC has also commenced two civil penalty proceedings alleging serious breaches of the DDO regime.

The Report sets out key observations and areas for improvement in four sections: product design, appropriateness of a TMD, distribution and oversight arrangements and monitoring and review arrangements. We have summarised the identified good practices and recommendations for improvement for issuers from each of the sections below.

Product design

ASIC reiterated that the DDO regime requires issuers to put consumers at the centre of the product design process, and this should be reflected in new product design as well as the TMD development process for new and existing products.

Product issuers are broadly required to prepare a TMD for a financial product before they engage in retail product distribution conduct. A TMD for a financial product must be such that it would be reasonable to conclude that, if the product were to be issued or sold in a regulated sale, it would likely be consistent with the likely objectives, financial situation and needs of the retail client. ASIC's view is that product governance arrangements (for both new and existing products) must include a design and approval system which includes an assessment of whether a financial product has been designed in this way (ie, that it is likely to be consistent with the likely objectives, financial situation and needs of the class of consumers for whom the product is intended). Issuers that do not give sufficient focus to the key attributes of products in assessing the target market and preparing the TMD run the risk of failing to appropriately define the target market for their products.


ASIC identified some good practices adopted by issuers of managed investment scheme interests, including that:

  • key senior staff were involved in the product and TMD development, with ultimate oversight and sign-off by the board of the responsible entity;
  • some issuers performed 'stress tests' on the relevant scheme to better appreciate the range of potential outcomes under normal market conditions and market stress; and
  • most issuers actively engaged their distributors in the product and TMD development process.
Areas for improvement

ASIC has identified the following key areas for improvement:

  • Avoid over-reliance on TMD templates: issuers should critically assess a product rather than relying on a TMD template to determine an appropriate target market for a product.
  • Design products with consumers in mind: attention should be given to niche or unusual features appropriate to a particular consumer group when designing products. These features should be appropriately reflected in the TMD.
  • Assess product features on 'absolute' basis: issuers should assess each product on its own merits, rather than in comparison with other products or against a benchmark.

Appropriateness of a TMD

Product issuers are required by the DDO regime to prepare a TMD that meets the content and appropriateness requirements in s994B of the Corporations Act. This section is not prescriptive about the level of detail that must be contained in a TMD about the target market for the product. The critical question is whether the target market is defined in such a way that the product is likely to be consistent with the likely objectives, financial situation and needs of the retail clients in the target market. The determination of whether a product is appropriate for a class of retail clients requires exercise of expertise in assessing the product's features and their appropriateness for a group of retail clients having regard to likely circumstances of the clients.


ASIC has flagged a number of concerns about non-compliance by issuers with both the 'content' and 'appropriateness' requirement in s994B of the Corporations Act. The Report notes that:

  • not clearly defining a target market was a factor in 15 stop orders;
  • inappropriate risk profiles being used in the target market was a factor in 21 stop orders;
  • including inappropriate levels of portfolio allocation in a target market was a factor in 10 stop orders;
  • inappropriate intended investment timeframe and/or withdrawal needs in the target market was a factor in 18 stop orders;
  • inappropriate or no distribution conditions was a factor in 13 stop orders; and
  • inappropriate use of a TMD template was a factor in 13 stop orders.
Areas for improvement

ASIC has identified 15 areas for improvement across each of these issues of concern.  

Among other things, ASIC had recommended:

  • Avoid 'sitting on the fence': issuers should avoid imprecise terms and language, and clearly define the class of consumers that fall within the target market in order to meet the appropriateness test in s994B(8)(b).1 In particular, ASIC has flagged concerns with TMDs for investment products which identify certain classes of consumers as being ‘potentially’ included in the target market. ‘Potentially’ including consumers in the target market can, in ASIC's view, lead to uncertainty about who is in or outside it and is likely to result in a TMD failing to meet the appropriateness requirements.
  • Consider the consumer's risk profile: reliance on the Standard Risk Measure (SRM) alone may be inadequate and product issuers should consider all important indicators of their product's risk profile, including the drawdown (the quantum of negative returns when they are observed), returns volatility, and the risk that returns may be positive but not meet a consumer’s objectives, financial situation and needs. Issuers should also ensure they are not understating their products risk level, such as by placing undue emphasis on a products returns and not sufficiently considering the potential loss or by assuming that past performance is always an indicator of future performance.
  • Avoid inappropriate levels of portfolio allocation in the TMD: issuers should assess diversification properly to justify higher levels of portfolio allocation for a consumer and describe levels of intended portfolio allocation with sufficient granularity in a TMD (ie, should avoid broad ranges of portfolio allocation in a target market such as 25–75%). Issuers should also avoid the assumption that the target market can be defined on the basis that consumers would hold the investment product as part of a well-diversified portfolio.
  • Intended investment timeframe and withdrawal needs should be clear: issuers should not indicate that high-risk products are suitable for consumers with a short investment timeframe, nor should the TMD suggest that consumers have a withdrawal right where that right is not actually a right to redeem their investment (but rather a right to do something else, such as to trade on a secondary market). Limitations on the redemptions for an investment product should be clearly reflected in the target market for the product (including where redemptions are at the discretion of the issuer).
  • Distribution conditions should be specified with tangible parameters: a TMD must include distribution conditions. These must be appropriate and tailored for each product without overreliance on a template. ASIC's view is that consumer 'self-certification' (ie, requiring consumers to self-certify that they are in the target market for a product) is not as sufficient as a distribution condition.
  • Templates should be used appropriately: templates should not be used in a 'tick-box' way and must be customised (which is a particular problem for products with unique features and/or elevated risks). Issuers should ensure that the adopted template is suitable for the product generally.

Distribution and oversight arrangements

Issuers and distributors must take reasonable steps that will, or are reasonably likely to, result in distribution of a product being consistent with the product’s TMD. In ASIC's view, to meet the reasonable steps obligation, an issuer must consider all aspects of a product’s distribution, including the distributors, methods, marketing, controls and supervision.

ASIC's recent review has focused on non-compliance with the TMD requirements, and has flagged that it plans to carry out surveillance work that focuses on compliance with the 'reasonable steps' obligation and will consider regulatory action where necessary. ASIC has, however, made a number of observations in the Report on compliance with the reasonable steps obligation based on its review of 12 issuers of managed investment schemes.

The DDO provisions do not specifically require issuers to directly supervise and monitor distributors. In many cases an issuer will have limited or no relationship with distributors such that its ability to monitor and supervise their conduct will be practically constrained.


Good distribution practices identified by ASIC included issuers requiring compliance checks of marketing material against TMDs to ensure consistency, and regular training for distributor staff to properly understand and apply the TMD. ASIC also found that some of the issuers implemented appropriate communication and oversight arrangements to monitor distributors and assessed whether distributor staff were sufficiently trained on the DDO and the TMD to appropriately sell the product.

Areas for improvement

However, ASIC has identified a number of areas for improvement, including:

  • Avoid over-reliance on questionnaires: issuers should avoid relying solely on questionnaires to direct distribution of the product to consumers in the target market. Questionnaires that simply ask whether the consumer have the characteristics in the target market based on their reading of the TMD and disclosure documents or which address only part of a target market are in ASIC's view deficient.
  • Ensure due diligence and ongoing monitoring of third-party distributors: Issuers should require evidence from third party distributors to substantiate they can meet the distribution obligations. The distributor's statements should be audited and verified to confirm their statements are followed in practice.
  • Ensure third-party distributors are monitored on an ongoing basis: The 'reasonable steps' obligation requires issuers to have clear policies and documented processes to ensure compliance with the TMD and other obligations. Issuers should continuously monitor and respond to ongoing design and distribution issues across an issuer’s business. Boards should be across compliance with the DDO regime across all stages of a product's life cycle and ensure it has ongoing and adequate oversight of the business’s product governance, distribution and review arrangements.

Monitoring and review arrangements (for TMDs)

Finally, ASIC also reviewed issuers' compliance with the obligation to review TMDs. Issuers are required to review TMDs within the review period specified in the TMD, if a review trigger occurs, or when other events or circumstances occur which reasonably suggest that the TMD is no longer appropriate.


ASIC found that most issuers of managed investment schemes had arrangements in place to identify when a review trigger or other event or circumstance suggesting a TMD was no longer appropriate had occurred. Most issuers had also documented a checklist or process for both periodic and reactive review of the TMD and, happily, all reviewed issuers anticipated the need to revise a scheme’s design, TMD or distribution practices as a result of such a review.

However, some issuers used review triggers that lacked specificity and required more detail. None of the issuers had contingencies for discontinuing a scheme because of a review. ASIC also noted that many issuers did not have documented procedures for assessing the adequacy of their distribution arrangements and conditions.

Areas for improvement

ASIC has identified the following key areas for improvement:

  • Review triggers should be specific and detailed: issuers should consider a more detailed range of factors that can help them identify if a TMD is no longer appropriate.
  • Reactive and periodic reviews should be refined: the checks undertaken as part of a 'reactive review' of a TMD (ie, those in response to a review trigger or event and circumstance) should be targeted and should address the issues with the TMD or product raised by the relevant review trigger, event or circumstance. For periodic reviews, those checks should be comprehensive and cover all aspects of a TMD and scheme to ensure they are working as intended.
  • Procedures for assessing the adequacy distribution arrangements and conditions should be documented and tested: ASIC expects issuers to test whether distribution arrangements and conditions remain adequate and appropriate, including assessing distribution channels and analysing distribution outcomes. Specifically, issuers should test whether distribution conditions are working as intended and whether third-party distributors remain competent and suited to distribute the product.
  • Issuers should develop contingencies for discontinuing a product: issuers should prepare contingency plans which consider whether, as a result of a review, a scheme or product may need to be removed from the market altogether due to significant consumer harms (eg, significant losses or where a managed investment scheme’s investment strategy becomes unviable).

Next steps

ASIC has issued a clear warning to issuers of investment products to 'lift their game' in respect of the DDO regime and enforcement action targeting poor design, pricing and distribution of financial products including in relation to insurance, superannuation and other investment products and credit remains an enforcement priority for ASIC throughout 2023.

ASIC says it has undertaken, or is undertaking, surveillance in relation to small amount credit, buy now pay later, credit cards, superannuation, derivatives and the investment products sector. It published its findings in relation to superannuation and small amount credit contracts last year. It is not clear whether it proposes to release additional reports in relation to its reviews in respect of the remaining products (buy now pay later, credit cards, derivatives) but, having issued a number of stop orders to date, its focus clearly remains across the industry.

Product issuers may want to proactively review and address ASIC's expectation about the level of detail that should be included in TMDs – including about the product features, the characteristics of clients in the target market, how distribution conditions operate, and the information required to be reported by distributors – and more generally consider their DDO framework against ASIC's latest expectations.


  1. That is, a TMD for a financial product must be such that it would be reasonable to conclude that, if the product were to be issued, or sold in a regulated sale to a retail client in the target market - it would likely be consistent with the likely objectives, financial situation and needs of the retail client.