Lenders can’t ‘abdicate’ distribution responsibilities to brokers

The new law puts in place new obligations on product issuers (i.e. lenders) of certain retail financial products (i.e. mortgages) that include making a “target market determination” that describes the type of clients that would take out the product and ensuring that product distributors do not distribute products unless a target market determination is in place (and that the product is not being offered to those outside of the target market).

The new bill also gives ASIC new powers to intervene and take temporary action where financial and credit products have resulted in or are likely to result in “significant consumer detriment” (currently under consultation).

While the design and distribution obligations do not take effect until 6 April 2021, the heads of Suncorp Bank have noted that more clarity and ongoing work will need to be undertaken across the finance industry to ensure that responsibilities are not unduly abdicated to intermediary product distributors, such as brokers.

Speaking at Suncorp’s Synergy Series event in Sydney on Wednesday (24 July), the CEO of banking and wealth, David Carter, along with the CEO of insurance, Gary Dransfield, and Suncorp’s executive general manager of intermediaries, Andrew Mair, reflected on the new powers.

The head of Suncorp’s insurance arm welcomed the new intervention powers on “toxic products”, but added that the “biggest challenge” Suncorp faced through the new distribution obligations is coming up with specific “target market” criteria for mass market products (such as comprehensive car insurance), which target “most of Australia”.

Defining a target market in this case, he said, therefore “seemed meaningless because they target so many people”.

Building on this, the general manager for intermediaries emphasised that “as a manufacturer who distributes through brokers, we cannot abdicate our responsibility [to them]”.

He said that while there was still more than 18 months to prepare the obligations before they come into force, he called on the industry to work closely with one another and the regulators to work out the “unknowns” and “make sure we have the right responsibilities to ensure brokers are distributing the products to the right target market”.

A large factor of this, he said, would be improving data reporting and transparency from intermediaries in order to “show the regulator that [the product] has gone to the target market”.

“This theme around transparency on every aspect of our world is coming on very strongly,” he added.

Speaking to The Adviser following the panel discussion, Mr Carter elaborated: “It would be fair to say that, until recently, the view around the industry was that there was a reasonable separation between manufacturing obligations and distribution obligations. This was probably particularly pronounced in the so-called tier-one products: funds management, wealth, superannuation, etc.

“Whilst it is less pronounced in the tier-two products and the distribution side of that, having said that – there is still a view that manufacturers have relatively limited responsibilities around how things are distributed because the distributors have their own licences and they have their own obligations. 

“I think the last 18 months has brought into focus that the current expectations are that manufacturers have greater visibility of how products are being distributed. Certainly greater visibility on the assurance, compliance, onboarding and offboarding processes in aggregators and/or the big GI broker intermediary groups – and we probably all need to be thinking about how we discharge that expectation,” the Suncorp CEO of banking and wealth said.

Mr Carter continued: “The new regulation that is proposed – the new standards coming from the ASIC regulation – suggests we are going to have to work through what kind of information we require [from intermediaries]...

“How do we share in those responsibilities and then, as a so-called ‘manufacturer’, what do I need to do to reassure myself that loan applications coming in – whether from a broker or from a lender at one of our stores, or indeed someone online – are meeting those obligations even when we are not directly controlling or owning the distribution channel?” he said.

“These conversations are going on at industry-body level and certainly in individual companies. But, bearing in mind that some of the regulations and some of the proposals from regulators are only just starting to surface, it is not entirely certain as to what the final form will be.

“But overarching all this is a clear sense that there is an expectation (regardless of the regulation) that we have a greater line of sight on an end-to-end value chain now.”

Noting that mortgage brokers often have access to 20 or more lenders, he outlined that it was therefore important for the industry to work together to ensure that there is a consistent, “sensible” method for meeting these new distribution obligations as brokers “would not be looking forward to having 20-something different ways of doing this”.

“So, we have to find ways to be sensible,” he added.

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