Design and Distribution Obligations (DDO) will be imposed from 5 April 2021. While a number of legislative reforms have been delayed due to the disruption from the global Covid-19 pandemic, this legislation has been passed and may not be delayed.
Business may have slowed down, but that may be a blessing in disguise – there’s 12 months for the industry to become compliant with the new DDO regime, and we expect that product issuers and product distributors will need every minute of it.
What is DDO?
In April last year, the government passed legislation implementing the DDO regime. The purpose of the DDO is to ensure that consumers are not at risk of purchasing products that are inappropriate for their needs, financial situation, and objectives.
To achieve this, the DDO imposes separate obligations on both product issuers and product distributors, relating to the design of the product and its subsequent distribution to retail consumers.
The next few months will be uncertain, but what is clear is that when everyone recovers, consumers will still need quality insurance products that are tailored for their needs. So how can you use the coming months to prepare for these changes?
Step One – Conduct an inventory of affected products
The first step for you, either as a product issuer (i.e. insurers and underwriting agencies) or a product distributor (i.e. authorised representatives and general insurance distributors) is to review the general insurance products you offer and confirm whether the DDO will actually apply.
The regime applies to any general insurance product that requires a Product Disclosure Statement (PDS) and which is in existence as at 5 April 2021, or created after this date. This analysis may result in a decision about whether to maintain the current number of affected products or reduce the products you intend to offer in 2021.
Step Two – Work out your obligations and begin your project plan
Separate parts of the DDO regime apply to product issuers and product distributors.
A Target Market Determination (TMD) must be prepared for each affected product. The person who is responsible for preparing the PDS should prepare the TMD (generally this will be the insurer or an underwriting agency who is the product issuer). TMDs need to have certain information about the product but importantly they must identify the target market for the product.
Product issuers must ensure that:
(i) all TMDs for the affected products;
(ii) review triggers;
(iii) review periods;
(iv) the content and distribution requirements for each TMD; and
Product distributors are required to:
Step Three – Map out, test and implement your product governance framework
Beyond drafting a TMD, issuers and distributors will have to work together to build out the technology and other systems (including record-keeping) to communicate and report to each other and to monitor whether sales are in compliance with the TMD or not.
Product issuers and product distributors have 12 months to plan and to develop a ‘product governance framework’. A ‘product governance framework’ is ASIC’s term for the systems, processes, procedures and arrangements that a product issuer and product distributor need to comply with the DDO regime.
For product issuers, this will include:
For product distributors, this will include:
As part of this, product issuers and product distributors will also need to:
In this digital (and remote working) world, many product issuers and product distributors will have systems in place to supply information and documents to consumers electronically (e.g. using email delivery, hosting documents on your website or customer access to an online portal) and to sell the products. Product issuers and product distributors should review these systems to identify whether they can be adapted to support the compliance requirements for DDO.
Take action as early as you can
There’s a lot to be done and less time than you might think. Our DDO Whitepaper is available here and contains more guidance on what the DDO regime means for you and how to prepare for it.
We can work with you to provide a detailed and customised roadmap that will help you understand the relevant requirements and project manage your DDO project. Get in touch – we’d be happy to help.