The design and distribution obligations for financial products (“DDO”) start on 5 October 2021.
If you are a product issuer using third parties to distribute your products, you should consider your agreements with those distributors and whether any changes are required for the DDO regime.
Product issuers must have a target market determination (“TMD”) for products that come under DDO.
Some of the changes that may be needed for distribution agreements flow from the matters that must be included in a TMD.
- Distribution conditions: The TMD has to include any conditions and restrictions on distribution of the product. Your distribution agreement therefore may need to include obligations that the distributor will only market and sell the product in accordance with the TMD. It’s possible that the agreement already covers this off if there are general obligations of the distributor to follow directions from the issuer or to comply with any conditions on distribution notified by the issuer.
- Reporting complaints: A TMD must also specify when a distributor has to provide the issuer with information about the number of complaints about the product. In our experience, financial product distribution agreements will often have clauses that require the distributor to provide reports to the issuer, and to provide information to the issuer when requested. Product issuers should consider whether existing clauses of this kind in their distribution agreements allow for the issuer to impose reporting requirements in relation to complaints, or whether more specific obligations need to be included about the information to be reported. Drafting should be flexible to allow for changes to reporting requirements from time to time.
- Review triggers: Another item that must be included in the TMD and which may impact on distribution agreements is details of information that the issuer will need from distributors to enable the issuer to promptly decide if the TMD may no longer be appropriate. This may be due to the occurrence of a review trigger or some other event or circumstance that would reasonably suggest this is the case. Complaints information (see above) may be one kind of information that is relevant. Other information to be provided from distributors could include profile data on consumers who acquire the product, for example. A distribution agreement should enable the product issuer to require that the distributor provide this information.
As well as clauses to cover off TMD related obligations, distribution agreements should be reviewed to ensure that they address the obligations of product distributors under the DDO regime.
- TMD for the product: One of the distributor obligations is that a distributor must not distribute a product unless a TMD has been made for it, so a distribution agreement should not require a distributor to distribute a product when there is no TMD. To protect the distributor, it could also require the issuer to have a TMD for the product.
- Distribution consistent with TMD: A distributor must also take reasonable steps that will (or are reasonably likely to) result in distribution of the product being consistent with the TMD. These steps could involve more than merely complying with the issuer’s distribution conditions. A distribution agreement should ensure that the distributor is required to act this way.
- Reporting obligations: A distributor of a financial product has obligations to report information to the issuer. This includes reporting on complaints, reporting on information for the issuer to decide if the TMD is no longer appropriate, and reporting on significant dealings in the product that are not consistent with the TMD. The legislation imposes 10 business day reporting deadlines for these reports. The reporting obligations under a distribution agreement will need to be broad enough to impose these obligations on the distributor.
- Record keeping: Distributors must collect and keep complete and accurate records. This includes records of complaints received, records of steps taken to ensure distribution consistently with the TMD, records of information that has to be reported to the issuer, and records of when information is reported to the issuer and the substance of those reports. Distribution agreements will often have record keeping o obligations, but consider whether they adequately cover all of these matters.
Compliance with laws clauses
Distribution agreements sometimes include general obligations on the parties to comply with all applicable laws, but that might not be enough when you need the distributor to comply not only with the laws but also with the mechanisms put in place by the issuer to comply with those laws, such as distribution conditions and reporting obligations.
Making amendments to agreements can take time because the changes have to be acceptable to all parties. With only a few months before DDO commences, issuers should be working now on any changes to their distribution agreements.
What if you are running out of time? You might need a temporary agreement that commits the parties to comply with the DDO regime while detailed changes to the agreements are finalised.
DDO also presents an opportunity to make other changes to distribution agreements, or maybe even a complete refresh.
The comments in this article are only general and not legal advice, but we can advise you on making changes to your distribution agreements for DDO.
Patrick Dwyer and Kathleen Harris
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