There are several reforms taking place that affect the distribution of superannuation products. In the case of the design and distribution obligations (DDOs), there are fewer than four months remaining until the new requirements commence on 5 October 2021.
The DDOs were passed following the recommendation of the 2014 Murray Financial System Inquiry, which acknowledged the limitations of disclosure in achieving good consumer outcomes. The DDOs seek to assist superannuation trustees and distributors of choice superannuation products to take a consumer-centric approach in the design and distribution of products. The obligations require trustees and distributors to put in place effective product governance arrangements across the product lifecycle.
ASIC has repeatedly reminded trustees of the importance of engaging with, and preparing for, these changes. Implementation of the DDOs and other requirements should not happen in isolation: trustees will best set themselves up for success if they consider all of these changes holistically, as part of their product governance arrangements. ASIC and APRA made this point in our joint letter issued in December 2020 in relation to the Member Outcome obligations and the DDOs. We expect, by now, trustees are well advanced in their preparations to meet the DDOs, working on their target market determinations (TMDs) and engaging with distributors.
Here I answer some questions trustees may have about how the DDOs affect superannuation.
What are the DDOs?
The DDOs are contained in Part 7.8A of the Corporations Act 2001. They require trustees to make publicly available a TMD that sets out the class of consumers for whom the relevant product is likely to be consistent with the consumers’ objectives, financial situation and needs (the target market). The TMD must also set out conditions on the distribution of the product, events or circumstances that suggest the determination is no longer appropriate and outline arrangements for reviewing its appropriateness.
Trustees are required to systemically review TMDs for products and will need to consider whether they need to make changes to their product, TMD or distribution arrangements from time to time. Product distributors have a range of obligations to assist a trustee in understanding what has happened in relation to the product and whether updates to the product design or distribution arrangements, as reflected in the TMD, are required.
It is worth noting that the DDOs are not an individualised product suitability test. Instead, they aim to ensure that trustees and product distributors take reasonable steps to distribute products in alignment with the products’ TMDs, and that trustees ultimately provide consumers with the most appropriate products for their circumstances.
Which superannuation products do the DDOs apply to?
Broadly, the DDOs apply to all choice superannuation products for which a product disclosure statement (PDS) is required, including retirement products. The DDOs do not apply to MySuper products, defined benefit interests, eligible rollover fund interests, or superannuation products that are no longer for issue or sale. Some products that are “off-sale” might still be subject to the DDOs if new issues of the product can be made. A useful guide may be whether a PDS is required for the issue of the product.
While MySuper products, including default insurance offered as a component of the product, are not subject to the DDOs, the links between MySuper and other financial products mean that the DDOs are likely to touch on aspects of MySuper product design and distribution. For example, many trustees offer the same insurance to consumers holding MySuper and choice superannuation products. As well, the marketing and promotion of MySuper and choice superannuation products may have common elements.
A TMD is not required for the MySuper product. However, one way to acquire a choice superannuation product may be by switching from a MySuper product. Trustees will need to consider this when drafting the TMD for the choice superannuation product and take reasonable steps to ensure that distribution of the choice superannuation product is consistent with that TMD.
How should the TMD address investment options?
Trustees must describe the target market for a choice superannuation product and its key attributes in the TMD. Key attributes are the features and attributes of the product that affect whether it is likely to be consistent with the potential objectives, financial situation and needs of consumers in the target market. Investment options are likely to be key attributes of a choice superannuation product and, therefore, the trustee may need to describe sub-markets for investment options in making the TMD for that product.
Example 9 in Regulatory Guide 274 Product design and distribution obligations (RG 274) illustrates the concept of sub-markets for investment options within a choice superannuation product. Another example of a key attribute, in the context of superannuation, is the insurance offered with a choice superannuation product.
What entities are considered product distributors?
To be a distributor of a choice superannuation product, an entity must fall within the ‘regulated person’ definition in the Corporations Act 2001. This definition is wide and includes Australian financial services (AFS) licensees and authorised representatives. It is important to note that ‘retail product distribution conduct’ encompasses everything from giving a PDS, financial product advice and arranging for the issue, or being an issuer or seller, of choice superannuation products.
As a general rule, the more a distributor is involved in a consumer acquiring a choice superannuation product, the more trustees will need to actively engage and work with the distributor to fulfill their DDOs. In some circumstances, comparison websites and fund administrators may be considered distributors of choice superannuation products. However, this depends on the activities undertaken by these types of entities.
Are employers considered distributors?
Employers undertake a range of activities that involve superannuation. Some of these activities fall within conduct that would normally require an AFS licence. However, employers are exempt from the requirement to hold an AFS licence when:
- paying superannuation guarantee (SG) contributions on behalf of an employee into a superannuation product; and
- arranging for the issue of a superannuation product to an employee.
Employers are not subject to the distribution obligations when carrying out these activities, which could be considered engaging in retail product distribution conduct. Further, employers are not considered to be engaged in this conduct when giving an employee a PDS for a default fund product of the employer and employee.
How do the DDOs apply when personal advice is provided?
For the purposes of the DDOs, personal advice, and any dealing by a person or their associate that consists of arranging for a consumer to apply for, or acquire, a product for the purpose of implementing the personal advice that was given, is considered excluded conduct.
When providing personal advice or implementing personal advice, a financial adviser is not required to take reasonable steps to ensure the distribution of a choice superannuation product is consistent with the TMD. However, consistent with guidance in RG 274, advisers should consider the TMD for the choice superannuation product in order to meet their best interest’s duty when providing personal advice.
While some distribution obligations do not apply to the excluded conduct, all distributors, including financial advisers, must still collect and maintain complete and accurate records of distribution information from all retail product distribution conduct. This obligation applies to all excluded conduct.
Distributors who give personal advice in relation to a choice superannuation product must provide information specified in the product’s TMD to the trustee and the number of complaints about the product according to reporting periods specified in the TMD. In addition, a distributor of a choice superannuation product, including an adviser, must notify the trustee of a significant dealing in the product that is not consistent with the product’s TMD. These record-keeping and reporting obligations are necessary for the review of TMDs as part of the DDOs and to support the effectiveness of the DDOs.
How does the personal advice exemption to ask questions apply?
In some cases, superannuation trustees may need to ask questions of a consumer to determine whether the consumer is in the target market for a choice superannuation product. The law provides an exemption from personal advice obligations for trustees and any other person to ask a consumer for information solely to determine whether they are in the target market of a superannuation product. This exemption also applies when informing the consumer of the result of the determination.
To reiterate, there are a number of reforms to superannuation product distribution taking place this year and trustees must prepare to meet the new requirements when they commence. Trustees and distributors should consult and share information with each other about products as part of developing effective product governance arrangements.
ASIC will be monitoring compliance with the new distribution requirements from 5 October 2021. This includes the review of a sample of TMDs for choice superannuation products to ensure that they meet the requirement to describe the target market and other TMD content obligations.