Treasury to amend DDO requirements

“These amendments are necessary to clarify the law, to ensure a consistent application of the law, and that the regime remains fit-for-purpose,” the government department said.

The new regime aims to help consumers obtain appropriate financial products by requiring issuers of financial products to determine an appropriate target market for these products, and requiring issuers and distributors to take reasonable steps to ensure that products are distributed accordingly.

Under the currently legislated DDO regime, lenders and brokers will need to take a consumer-centric approach to how they design and distribute mortgages from 5 October, as outlined in ASIC’s December 2020 regulatory guide.

However, the Mortgage and Finance Association of Australia (MFAA) has previously highlighted that there were some clarifications that could be made to make the DDOs more appropriate for the broking sector.

CEO Mike Felton said earlier this month: “In essence, the issuer creates a target market determination and then the distributor is required to distribute in accordance with that target market determination. Now, both brokers and aggregators are suited to be distributors under design and distribution obligations...

“We are of the belief that with [mortgage brokers] having a best interests duty [BID], which is in fact a far higher duty than anything specified under design distribution obligations, it would be appropriate that [they] should not have to meet the target market determination, or to be worried about that.”

Mr Felton added that while personal advice is an excluded conduct clause in regards to the distribution of financial products, this concept only exists in corporations law, not in credit law, and therefore excludes financial advisers, rather than brokers.

“Treasury has acknowledged that the intent is for brokers to be excluded conduct because of their personal advice, and they’re working on clarifying that,” he said.

Treasury has now said it will bring in amendments to “make clear that more streamlined obligations (i.e. only record-keeping and notification obligations) for distributors only apply where the intermediary has a duty to act in the consumer’s best interests, such as where personal advice is provided under the Corporations Act, or where mortgage brokers engage in similar conduct”.

In total, the proposed changes include:

• Clarifying that margin lending to corporates is exempt from DDO obligations (“consistent with the intention that all margin lending is to be exempt from DDO”);
• Clarifying employees of licensees are not subject to their own separate set of DDO obligations (“as this was not an intended consequence of the regime”);
• Ensuring 31-day term deposits fall within the DDO regime (“which is consistent with government’s intention to capture all basic deposit products”);
• Providing consistency in the application of retail and wholesale investor definitions across the Corporations Act by ensuring it extends to the DDO regime;
• Exempting foreign cash settled immediately from the DDO regime (“as the risk for consumers is relatively low”); and
• Exempting non-cash-payment facilities (NCPFs) from the DDO regime except for certain facilities, specifically credit and debit card facilities and stored value facilities. (“Broadly, NCPFs are not standalone services and provide a facility for consumers to make non-cash payments, posing lesser risk to them,” Treasury said).

The government department said it would consult on these changes with stakeholders “in due course”.

Given the changes, Treasury has said that the Australian Securities and Investments Commission (ASIC) will provide temporary relief giving effect to the government’s policy intention in the interim period, before the legislative changes are made. 

This will allow the government time to make these changes permanent and “will avoid industry needing to implement product governance arrangements, ahead of commencement, for products that are ultimately not intended to be caught by these reforms”.

As well as updating the DDO reforms, the government this week passed legislation enabling digital signatures to be used on documents until 31 March 2022, with plans to introduce permanent reforms later this year.

Following widespread calls for these to be reintroduced (and extended to business loans too), and following debate in both houses, the rules have now been extended until 31 March 2022, with government saying it will look to bring in permanent reforms later this year.

[Related: Association working to ‘fix’ reference checking laws]