DDO - what it means for Investors

It’s hard to believe that it has been seven years since the conclusion of the 2014 Financial System Inquiry, chaired by David Murray. The first detailed examination of the Australian Financial System in 17 years, the Inquiry was intended to initiate reform in the aftermath of the 2008 global financial crisis.

Among many observations, the resulting report highlighted the limitations of the existing framework for consumer protection. In the financial system, there was a heavy reliance on disclosure, financial advice and financial literacy, which resulted in cases of consumer detriment. As a result, the federal government wanted to place additional responsibility for consumer outcomes on issuers and distributors. This gave rise to a new Design and Distribution Obligations (DDO) regime, outlined in ASIC’s Regulatory Guide 274: Product Design and Distribution Obligations.

In this article, we outline what you need to know about DDO, and what it means for you, the investor.

What is the intent of DDO?

DDO is intended to help consumers obtain appropriate financial products by requiring issuers and distributors to have a consumer-centric approach to designing and distributing products.

From 5th October 2021, the DDO regime has placed several obligations on product issuers and distributors including to:

  • design financial products that are likely to be consistent with the likely objectives, financial situation and needs of the consumers for whom they are intended
  • prepare and make available a target market determination
  • take reasonable steps to deliver financial products to the intended target market
  • effectively monitor consumer and product outcomes to ensure the above objectives are being met, and
  • maintain robust and effective product governance arrangements.

What is a Target Market Determination (TMD)?

A target market determination outlines the class of retail investors for whom a financial product is likely to be appropriate or consistent with their likely objectives, financial situation and needs. It also outlines any distribution conditions and information related to the review and monitoring of the product.

The Financial Services Council (FSC) developed a template TMD which Schroders has adopted, along with many other providers. The FSC looked at the key characteristics of a fund that may be relevant for a potential investor to determine if it would likely be suitable for them. The FSC came up with the following key attributes that would be pertinent to the decision-making process:

  • investment objective
  • intended product use (i.e., what proportion of an investor’s overall investment portfolio)
  • investment time horizon
  • liquidity requirements, and
  • risk/return profile

Each product issuer must assess their funds against these five attributes and rate each fund as green which means it is ‘suitable’, amber which means it is ‘potentially suitable’ or red which means it is ‘unsuitable’. To be considered outside of the TMD an investor would have one or more red ratings or three or more amber ratings when assessed against the TMD.

In accordance with our DDO obligations, Schroders has considered the design of each Fund (including its key attributes) and determined an appropriate target market – that is, a class of investors for whom the Fund would likely be appropriate, and would be likely to align with their objectives, financial situation and needs. These considerations are documented in the TMD.

How does an investor use a TMD?

The TMD needs to be publicly available, should you wish to refer to it.

A copy of the current TMD for each Fund is available on the Schroders website.

Copies of historical TMDs can also be obtained by contacting Schroders.

We may from time to time seek information from individual investors to ensure that a Fund is distributed in accordance with its TMD or to otherwise fulfil our obligations under the DDO regime. While these questions refer to an investor’s objectives, financial situation and needs, these are for the purpose of determining if an investor meets the TMD. They do not constitute personal advice. If you require personal financial product advice that considers your objectives, financial situation and needs, you will need to contact a financial adviser.

How does the traffic light system work?

If you do wish to refer to the TMD and determine whether you are within the target market, then you should consider how you intend to use the product and review the TMD’s RAG (Red, Amber and Green) status for each category as it relates to your intended use:

  • investment objective
  • intended product use (i.e., what proportion of an investor’s overall investment portfolio)
  • investment time horizon
  • liquidity requirements, and
  • risk/return profile

The assessment should be done on your intended purpose of this specific investment within your portfolio. Consider the scenario where, as an investor, you may have a Low to Medium risk and return profile overall. If you are holding a product with a High or Very High risk/return profile as a small percentage of your total portfolio, it may be likely that a product is consistent with your objectives for that allocation notwithstanding that your risk/return profile is Low or Medium.

What if an investor is considered to be outside the TMD?

The DDO regime is not an individual suitability test. Investors are still permitted to invest in a Fund, even if they fall outside the TMD, provided there are no distribution conditions limiting distribution to those inside the TMD, which may occur where the risk of harm is deemed to be high.

How do financial advisers use a TMD?

Where financial products are distributed along with the provision of personal advice, existing Best Interest Duty controls and processes would typically go above the reasonable steps required to distribute according to the TMDs. Financial advisers can use the TMD to assist with their product research and with meeting their obligations in regard to ensuring the best interests of their clients.

Where the product distribution does not include personal advice, advisers must use the TMD to meet their Reasonable Steps requirement (and other distribution obligations). To learn more about the ‘Best Interest Duty’ and ‘Reasonable Steps’ requirements, please visit the ASIC website for a summary of the ‘Future of Financial Advice’ (FOFA) reforms.

Do you have questions about DDO?

If you have further questions about DDO or TMD, we’d be glad to assist. Call Client Services on 1300 136 471 or email DDO@schroders.com

Important Information:
Important Information: This material has been issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders) for information purposes only. The views and opinions contained in this material are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other Schroders communications, strategies or funds. The information contained is general information only and does not take into account your objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.