Design and Distribution Obligations: target market determinations under Part 7.8A

Legal framework

Part 7.8A of the Corporations Act introduced the Design and Distribution Obligations (DDO), which commenced on 5 October 2021. The DDO applies to issuers and distributors of financial products requiring a Product Disclosure Statement (PDS) or Part 7.9 disclosure, and most credit products. Certain products are excluded from these obligations, including MySuper products, ordinary shares in listed companies and some margin lending facilities. Design and distribution obligations RG 274 provides the principal guidance for issuers and distributors.

The DDO framework establishes requirements for product design, target market determination (TMD), and ongoing monitoring and review. Issuers must design financial products that meet the needs of the identified target market. Distributors must only distribute products to those in the target market.

Breaches of the DDO can result in civil penalties. For body corporates, the maximum penalty is the greater of 50,000 penalty units, three times the benefit derived, or 10% of annual turnover (capped at 2.5 million penalty units). Design and distribution obligations RG 274 details these obligations further.

Target market determination (TMD)

A Target Market Determination (TMD) is a written document that an issuer must prepare before commencing retail distribution of a financial product. It defines the class of consumers who form the target market for the product. This description includes details of those consumers’ likely objectives, financial situation and needs.

The TMD also establishes distribution conditions, review triggers, and periodic review periods. Issuers are required to apply an appropriateness test to ensure the financial product is likely to be consistent with the target market’s likely objectives, financial situation and needs. This test is a key component of the Design and Distribution Obligations. ASIC product intervention orders RG 272 provides further context.

Before any retail distribution begins, the TMD must be publicly available free of charge. This transparency is intended to assist consumers and distributors in understanding the intended target market for the financial product.

Reasonable steps obligation for distributors

Distributors have a legal obligation to take reasonable steps to ensure distribution of regulated products aligns with the target market determination (TMD). This requirement, outlined in the legislation, means distributors must actively work to ensure their distribution practices are consistent with the TMD. Vulnerable customer protections in financial services are a key consideration in this process.

Recent findings from ASIC Report 795 (2024) highlight common areas of non-compliance, such as failing to update TMDs based on available data and employing inadequate filtering mechanisms. Reasonable steps to address these issues include providing staff training, implementing systems to identify and exclude consumers outside the target market, and regularly monitoring complaints.

Distributors must maintain records of complaints and any significant dealings that are inconsistent with the TMD. Dealing in regulated products without a current TMD is prohibited.

Reporting and review

Distributors have obligations to report dealings inconsistent with a target market determination (TMD). They must report significant dealings inconsistent with the TMD to the issuer within 10 business days. Distributors also provide information to the issuer about complaints and dealings, both when requested and at periodic intervals.

Issuers are responsible for reviewing TMDs. Reviews must occur at the times specified within the TMD itself, and also when a review trigger occurs. Examples of review triggers include material changes to product features or a surge in complaints.

If a review trigger occurs, issuers must pause distribution until the TMD is updated or distribution ceases. The Australian Securities and Investments Commission (ASIC) has the power to issue stop orders under s 994L, and has done so, for example, against high-risk crypto and FX products where TMDs were deemed inadequate ASIC product intervention orders RG 272.