29 June 2021

Distributing financial products will become more challenging

This article was written by Jim Boynton and Max Sturt

Distributing financial products to retail clients under what is known as a general advice model will soon become challenging for many distributors. This is because of the expansive interpretation recently given by the High Court to what constitutes personal advice and the new design and distribution obligations (DDO) that will apply from 5 October 2021. The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry endorsed and recommended extending DDO. However DDO are a good example of what the report cautioned against, which was adding a new layer of regulation will not assist as it will add to what is already a complex regulatory regime.

As part of the new DDO regime, a target market determination (TMD) must be prepared for a wide range of retail financial products and credit products. The TMD must be prepared so that it is reasonable to conclude that if the product is issued to a retail client in the target market it would likely be consistent with the objectives, financial situation and needs of the retail client. Distributors must take reasonable steps to ensure that that it is reasonably likely that their advice or dealings in relation to a product will be consistent with the TMD.

If an advice provider actually considers objectives, financial situation or needs of a retail client (or a reasonable person might expect the adviser to have done so) that is personal advice. The High Court recently found that where there is a pre-existing relationship between a licensee and the client,[1] a reasonable person in the client’s position might expect the licensee would have taken into account their objectives, financial situation and needs when communicating with the client. This makes is easy for distributors with pre-existing relationships with clients to give personal advice.

Giving personal advice triggers additional statutory obligations that are inconsistent with current general advice models. The DDO regime provides a narrow exception to providing personal advice where a distributor asks for information solely to determine whether a person is in a target market.

It would be in clients’ interest if distributors can take into account what the distributors know about their clients. It would also be consistent with DDO’s object which is to promote the provision of suitable financial products to consumers. However if this can only be done by giving personal advice, distributors will either need to find ways to comply without taking into account that information or cease to provide general advice. A better solution for both distributors and clients would be for the Government to amend the DDO regime to take into account the effect of the recent High Court decision.

[1] Westpac Securities Administration Ltd & Anor v Australian Securities and Investments Commission [2021] HCA 3

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