Design and Distribution Obligations (DDO): RG 274 + the Target Market Determination

What DDO is

The Design and Distribution Obligations are a set of requirements outlined in Part 7.8A of the Corporations Act 2001. These obligations aim to ensure financial products are designed so they meet the needs of the consumers they are intended for, and that consumers are given appropriate information about those products.

DDO applies to both issuers and distributors of financial products. This includes financial products that require a Product Disclosure Statement. Credit products are also subject to DDO, although through analogous provisions within the National Consumer Credit Protection Act 2009.

The Design and Distribution Obligations became enforceable on 5 October 2021, coinciding with the commencement of ASIC Regulatory Guide 271 standards relating to internal dispute resolution.

The Target Market Determination

Issuers are required to prepare a Target Market Determination (TMD) for each covered product prior to its distribution to retail clients. This document outlines the intended recipients of the product, identifying the class of consumers for whom the product is considered appropriate – the target market. It also details the conditions and restrictions that govern how the product can be distributed.

The TMD also specifies review triggers, which dictate when a reassessment of the determination is necessary. Furthermore, it outlines the reporting obligations for distributors, ensuring issuers receive feedback on product suitability and distribution practices.

The content of each TMD must be publicly accessible, generally made available on the issuer’s website, often in conjunction with the product disclosure statement (PDS).

Distributor duties

Distributors have specific obligations under the Design and Distribution Obligations (DDO) framework, as detailed in ASIC Regulatory Guide 274. These duties are focused on ensuring that the distribution of a financial product aligns with the Target Market Determination (TMD). A distributor must take reasonable steps that will, or are reasonably likely to, result in distribution being consistent with the TMD. director duties self-check

Distributors are also required to maintain detailed records. These records must include complaints received and details of any significant dealings that occur outside the target market. This record-keeping function supports accountability and allows for ongoing monitoring of distribution practices.

Furthermore, distributors must promptly report significant dealings outside the TMD to the issuer. This reporting obligation requires submission within 10 business days of the dealing.

Penalties + enforcement

Breaches of the Design and Distribution Obligations (DDO) attract civil penalties. For bodies corporate, the maximum penalty is the greater of a specified penalty-unit amount, three times the benefit obtained from the breach, or 10% of annual turnover for the relevant period.

The Australian Securities and Investments Commission (ASIC) is responsible for enforcing the DDO. Initial enforcement activity has centred on insurance products and short-term credit, with a continued focus on consumer-facing financial-product features.

ASIC has the power to take further action beyond civil penalties. This includes the ability to issue stop orders, requiring an issuer or distributor to cease conduct that is in breach of the DDO.