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Explaining the new “Design & Distribution” obligations

As part of the ongoing reforms taking place in the financial services industry, the Design & Distribution Obligations (DDO) regime is the next change about to be implemented, and comes into effect on the 5th October 2021. At its core, the DDO regime is attempting to ensure that financial products are designed and distributed to the right people.

The Target Market Determination (TMD)

The main way in which the DDO regime will operate is via product issuers identifying the ‘target market’ of the product. Product issuers (such as those that issue managed funds, ETFs, insurance products etc) must make a ‘target market determination’ (or TMD) for each product.

The TMD will describe the typical objectives, financial situation and needs of consumers in the target market. It will also detail the product features, and provide an explanation of why those features are likely to meet consumers’ needs. Time horizon, risk level, and other relevant suitability criteria will also need to be included. In some cases, a TMD may also identify the excluded class of consumers – those consumers for whom the product is NOT deemed suitable for, although this is not mandatory.

One of the other key issues for members of The SMSF Investor is that the TMD will also describe how the product is to be distributed. Product issuers may decide that they should only be distributed via certain means. For example, this may be limited to say a contact centre, or via licensed financial advisers etc.

How does all this affect Lonsec / The SMSF Investor and its members?

Lonsec provides general advice in the form of ratings and research, and is classed as a Distributor under the Design and Distribution Obligation (DDO) regime. This means that in order to provide our ratings and research, we are obliged to collect TMD documents from Product Issuers. We must ensure that all products with a Lonsec Research rating have a TMD in place from 5 October 2021, when the DDO regime comes into effect.

It also means that any managed funds or ETFs that have elected in their TMD that their product is NOT suitable for direct / retail investors, or have stated that their product should only be distributed via certain means outside of our online environment (e.g. such as via a financial adviser), will need to be EXCLUDED from the research tables within The SMSF Investor’s member research portal.

How many funds will be affected?

Out of the over 1100 managed funds that were in the research tables, there are only around about 70 funds that need to be excluded. Looking at the list, many of the funds are those that tend to be either higher risk / volatility funds, or using somewhat more complex investment strategies that may require more detailed explanation from an adviser. For the vast majority of investors using traditional funds and ETFs, the effect should be minimal.

How to access the TMD of a fund?

The product issuers of managed funds and ETFs will likely all have the TMD of their respective funds available to view on their websites. If you would like to view these, please contact the fund provider directly.

When will the tables be updated ?

Due to a public holiday in Sydney on the day before the 5th October deadline, we plan on updating the research tables to exclude the affected funds and ETFs on the prior Friday, the 1st October.

The bottom line

If a managed fund or ETF you have previously accessed research on via The SMSF Investor’s investment research tables is no longer there after the update on the 1st October, it is highly likely it has been excluded due to the new DDO regime.

 

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the document or any information. ©2021 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited.