Design & Distribution Obligations for ACL Holders: A Clear-Cut Guide to Getting Compliance Right

Introduction

The Design and Distribution Obligations (DDO), established under the Corporations Act 2001 (Cth), represent a fundamental shift in the regulatory approach for financial products in Australia. This DDO regime moves beyond traditional disclosure by placing direct responsibility on product issuers and distributors to adopt a consumer-centric approach, ensuring that products are designed and distributed to achieve positive consumer outcomes.

For Australian Credit Licence (ACL) holders, who are central to the credit industry, understanding these DDO is critical for compliance and effective product governance. This guide offers essential information and practical guidance to help ACL holders navigate their responsibilities as both issuers and distributors, ensuring their product governance arrangements align with the requirements of the DDO regime.

What Are Design & Distribution Obligations For ACL Holders

The Purpose Of The DDO Regime For Consumer Outcomes

The DDO were introduced following a recommendation from the Financial System Inquiry (FSI) in 2014. The FSI identified significant limitations in a consumer protection framework that depended heavily on disclosure documents, financial advice, and the financial literacy of consumers.

According to the Australian Securities and Investments Commission’s (ASIC’s) Regulatory Guide 274, disclosure alone was often ineffective in achieving good consumer outcomes. This regulatory shift acknowledges that poor product design and distribution practices have been a major contributor to consumer detriment.

The DDO regime acts as a supply-side intervention, placing greater responsibility on product issuers and distributors to ensure their practices lead to positive results for consumers. Its fundamental purpose is to foster a more consumer-centric approach to the design and distribution of financial products, including credit.

Key Principles Of The DDO Framework

The DDO framework is built on several core principles that guide how ACL holders must operate. Rather than following a set of prescriptive rules, the regime is outcomes-based, focusing on achieving positive and fair results for consumers.

This represents a significant shift, making issuers and distributors accountable for the entire product lifecycle. The key principles underpinning the DDO include:

Principle	Description
A Consumer-Centric Approach	Issuers are required to design financial products that are likely to be consistent with the objectives, financial situation, and needs of a specific target market. This ensures that consumer needs are at the forefront of product development.
Targeted Distribution	Both issuers and distributors must take reasonable steps to ensure that financial products are directed and sold to the class of consumers identified in the Target Market Determination (TMD). This prevents the mis-selling of products to those for whom they are not appropriate.
Ongoing Monitoring and Review	Issuers have a responsibility to monitor the outcomes for consumers who have acquired their products. They must conduct regular reviews to ensure the product and its distribution strategy remain appropriate and continue to provide fair value.
Accountability and Reporting	The DDO regime establishes clear reporting lines. Distributors must report specific information, such as complaints and significant dealings outside the target market, to the issuer. In turn, issuers must notify ASIC of any significant dealings that are inconsistent with the TMD.

The Core Components Of DDO Compliance

Understanding The Target Market Determination

A Target Market Determination (TMD) is a fundamental written document within the DDO framework. As outlined in ASIC’s RG 274, its purpose is to instil discipline in the design of financial products, ensuring that issuers create products for which an appropriate target market can be clearly defined.

This document serves as a central reference point for both issuers and distributors to meet their obligations. A compliant TMD must:

TMD Requirement	Description
Describe the Target Market	It must clearly set out the type of consumer the product has been designed for, considering the likely objectives, financial situation, and needs of those individuals.
Establish Distribution Conditions	The document must detail any specific conditions or restrictions on how the product is sold to make it likely that it reaches consumers within the intended target market.
Set Reporting and Review Requirements	It must specify what information distributors need to report back to the issuer, such as complaint numbers, and establish triggers for when the TMD itself must be reviewed to ensure it remains appropriate.

Establishing Product Governance & Distribution Arrangements

The DDO requires ACL holders to implement and maintain reliable and effective product governance arrangements. These arrangements are the systems, controls, and processes that ensure compliance with the DDO regime throughout the entire lifecycle of a financial product.

The need for such robust frameworks was highlighted by findings from the FSI and the Royal Commission, which pointed to weaknesses in product distribution controls leading to significant consumer losses.

Effective product governance arrangements must cover every stage of a product’s journey. ASIC’s RG 274 outlines these key stages, which must be considered when establishing compliance frameworks:

Stage	Description
Product Design	This initial stage involves a critical assessment to ensure a financial product is designed in a way that is likely to be consistent with the objectives, financial situation, and needs of its intended target market.
Product Distribution	This stage requires having appropriate processes and controls in place to reduce the risk that a product is acquired by consumers for whom it is not appropriate.
Monitoring and Review	This is an ongoing and responsive process where issuers must regularly monitor product performance and consumer outcomes, addressing any problems that arise by reviewing and, if necessary, amending the product or its distribution strategy.

Key DDO Obligations For Issuers Of Credit Products

Preparing & Reviewing A Target Market Determination

Under the DDO, issuers must prepare a publicly available TMD before a credit product is distributed to consumers. This document is central to the DDO regime and must be created for each financial product, outlining the intended consumers and the conditions for distribution.

To comply with the requirements of the Corporations Act 2001 (Cth), a TMD must be a written document that meets several content requirements. According to ASIC’s RG 274, the TMD must:

• Describe the class of consumers that makes up the target market for the product.
• Specify any conditions or restrictions on how the product is distributed to ensure it reaches the target market.
• Outline the events or circumstances, known as ‘review triggers’, that would suggest the TMD is no longer appropriate.
• State the maximum periods for the first and subsequent periodic reviews of the TMD.
• Detail the reporting periods for distributors to provide information on the number of complaints received about the product.
• Specify what other information distributors need to report to the issuer to help identify if a review trigger has occurred.

The DDO regime requires more than just the initial creation of a TMD; issuers have an ongoing responsibility to review it. This ensures the TMD remains appropriate throughout the product’s lifecycle.

An issuer must conduct a review if:

• A specified review trigger occurs
• Any other event reasonably suggests the TMD is no longer suitable

Reviews must also be conducted periodically at the intervals set out in the TMD itself. Following a review trigger, the issuer must complete its review within 10 business days.

Additionally, issuers are required to keep complete and accurate records of all decisions made regarding their TMDs and any subsequent reviews.

Taking Reasonable Steps & Notifying ASIC Of Significant Dealings

A core component of an issuer’s product governance arrangements is the obligation to take ‘reasonable steps’ that are likely to result in the distribution of a credit product being consistent with its TMD. This does not mean an issuer fails its obligation simply because a consumer outside the target market acquires the product. Rather, it requires the issuer to implement effective systems and controls to manage the risk of inconsistent distribution.

When determining what steps are reasonable, an issuer must consider several factors, including:

• The likelihood of distribution being inconsistent with the TMD and the nature and degree of harm that could result.
• The steps that can be taken to eliminate or minimise the risk of inconsistent distribution and any potential harm.
• The complexity and risk profile of the product and the nature of the relationship between the issuer and its distributors.

In addition to managing distribution, issuers must notify ASIC of any ‘significant dealing’ that is not consistent with the product’s TMD. This notification must be made in writing as soon as practicable, and no later than 10 business days after the issuer becomes aware of the significant dealing.

The term ‘significant dealing’ is not defined in the legislation and must be assessed based on the specific circumstances. Factors that help determine whether a dealing is significant include:

• The proportion of consumers acquiring the product who are not in the target market.
• The actual or potential harm, including financial loss, to consumers outside the target market.
• The nature and extent of the inconsistency between the distribution and the TMD.
• The time frame over which the inconsistent dealings occurred.

Key DDO Obligations For Distributors Of Credit Products

Taking Reasonable Steps To Ensure Compliant Distribution

Under the DDO, a distributor must take reasonable steps to ensure the distribution of a credit product aligns with its TMD. This cornerstone obligation, outlined in section 994E(3) of the Corporations Act 2001 (Cth), requires robust product governance arrangements.

Simply complying with the distribution conditions in the TMD is not always sufficient. Distributors must consider what additional steps are reasonable in their specific circumstances. When determining these reasonable steps, distributors should evaluate:

Factor to Evaluate	Description
Risk	The likelihood of distribution being inconsistent with the TMD.
Harm	The nature and degree of potential harm if the product is distributed outside the TMD.
Mitigation	Steps that can eliminate or minimise inconsistent distribution risks and potential harm.

To ensure compliant distribution, effective controls should be implemented across various operational aspects:

Control Area	Description
Distribution Method	Channels used to interact with consumers (online, face-to-face, telephone) must suit the product and its target market. High-risk products with narrow target markets should avoid mass-market advertising.
Marketing and Promotion	All promotional materials must align with the product’s TMD to reach the appropriate consumer base.
Incentives	Remuneration structures should not encourage behaviour leading to inconsistent distribution or poor consumer outcomes.
Training and Skills	Staff involved in distribution must understand the product’s key attributes, target market, and their DDO obligations.

Reporting Significant Dealings & Other Information To The Issuer

A critical responsibility for distributors under the DDO regime is collecting and reporting specific information to product issuers. This ensures issuers have necessary data to monitor consumer outcomes and review TMD appropriateness.

If a distributor becomes aware of a ‘significant dealing’ inconsistent with a product’s TMD, they must notify the issuer in writing promptly—no later than 10 business days after becoming aware. This requirement, detailed in ASIC’s RG 274, applies even to those providing personal advice. Such notification allows issuers to assess the situation and meet their own ASIC reporting obligations if necessary.

Beyond significant dealings, distributors have broader reporting duties. The DDO requires distributors to provide issuers with:

Reporting Requirement	Details
Complaint Information	Number of complaints received about a financial product during the TMD-specified reporting period.
TMD-Specific Information	Any other information specified in the TMD for identifying review triggers or events suggesting the TMD may no longer be appropriate.
Significant Dealings	Details of any significant dealings inconsistent with the product’s TMD.

To support these reporting requirements, distributors must maintain complete and accurate records of:

• Distribution information
• Complaints
• Steps taken to ensure TMD-consistent distribution
• All information reported to the issuer

ASIC Enforcement & Penalties For Non-Compliance

Understanding ASIC’s Stop Orders & Other Powers

ASIC possesses significant enforcement powers to ensure compliance with the DDO. Under Part 7.8A of the Corporations Act 2001 (Cth), ASIC can issue a stop order to prohibit entities from engaging in specific conduct when it determines a breach of the DDO regime has occurred.

According to ASIC’s RG 274, stop orders can be issued for various contraventions, including:

• Failing to create, review, or make a TMD publicly available
• Distributing a financial product before a TMD has been made or when a TMD is no longer appropriate
• Failing to take the reasonable steps required to ensure distribution is consistent with the TMD

The process for issuing stop orders typically involves:

• ASIC holding a hearing to allow interested parties to make submissions before making a final stop order
• In cases where ASIC believes a delay would be prejudicial to the public interest, it can issue an interim stop order without a hearing
• Interim stop orders remain in effect for 21 days unless revoked earlier

These orders can have a significant impact on a licensee’s reputation and business operations.

Consequences Of Breaching Your DDO Obligations

Failing to comply with the DDO can lead to severe consequences. The Corporations Act 2001 (Cth) imposes both civil and criminal liability for contraventions of the DDO regime.

If a consumer suffers loss or damage because an entity has breached its obligations, they have the right to recover that loss by taking legal action in court. As outlined in RG 274, a court can order compensation for the loss or damage suffered.

The court also has the power to make other orders to ensure justice, which may include:

• Declaring a contract void
• Ordering the return of any money paid by the consumer

ASIC has demonstrated its willingness to enforce these obligations, having already commenced civil proceedings against firms for non-compliance. These actions have resulted in significant penalties, highlighting the financial and reputational risks for ACL holders who fail to establish and maintain effective product governance arrangements.

Conclusion

The DDO represents a significant regulatory framework requiring ACL holders to adopt a consumer-centric approach throughout the lifecycle of financial products. This includes designing products that align with the likely objectives, financial situation, and needs of the target market, taking reasonable steps to ensure distribution is consistent with the TMD, monitoring consumer outcomes, and promptly reviewing and updating the TMD as necessary. Both issuers and distributors share responsibilities to maintain robust product governance arrangements that reduce the risk of consumer detriment and ensure compliance with the DDO regime under the Corporations Act 2001 (Cth).

To effectively manage these obligations and safeguard your business, contact the experts at AFSL House today. Our trusted expertise and specialised ACL application services tailored to your needs can help you implement proven solutions for DDO compliance, simplify your workload, and secure positive consumer outcomes. Don’t miss this opportunity to achieve peace of mind and maintain regulatory confidence in a complex financial services environment.

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