“Well, good for you, you look happy and healthy
Not me, if you ever cared to ask
Good for you, you’re doing great out there without me, baby
God, I wish that I could do that”
— ASIC Regulatory Guide 274 “Product Design and Distribution Obligations” (or possibly “Good4U” bu Olivia Rodrigo)
Products, services and facilities
As you know, we’re big fans of the MDA Guru and we often turn to him to help our clients manage the commercial and operational elements involved in using an MDA. But, as you also know, our views don’t always align.
With the imminent commencement of the DDO regime, we thought asking Peter Turbach, the MDA Guru, and Sean Graham, our Managing Director to address the key issues would be a useful and entertaining exercise.
We never anticipated that their responses would be more contentious than their differing positions on RG179.2, but we still encourage you to read their responses to the following questions:
- Is a TMD necessary?
- Who issues the TMD?
- Does Custody matter?
- Why should I issue a TMD?
- Who can help me with this?
- Who is Peter Turbach?
1. Is a TMD necessary?
PETER
Legally or morally?
Legally it is appears unclear, and therefore as an MDA Provider I would want to protect my AFSL. It does not have to be akin to war and peace. It only needs to be a short succinct document that captures the necessary elements of the DDO as pertaining to MDAs.
Morally, at first, I didn’t think so.
The generality of suitability in the TMD is far inferior to the Best Interest’s Duty (BID) captured in specific personal advice. Looking into the intentions of the DDO I started to change my mind. I believe a TMD presented along with an FSG would provide a client with additional concise information on whether an MDA would be suitable, allowing them to make an informed decision.
SEAN
No.
I appreciate that being definitive can be problematic in a number of ways, and I’m open to being convinced otherwise, but I don’t think a Managed Discretionary Account requires a Target Market Determination (and here i’m excluding SMAs).
The reason that a TMD is not generally required for an MDA is because, at the risk of oversimplification, the Design and Distribution Obligations only apply to products that are required to issue Product Disclosure Statements. MDAs aren’t required to issue PDS and so, in my view, aren’t required to issue TMD.
Quite apart from that, the additional retail protections that apply to MDA (including intermediated distribution, MDA contract, personal advice obligations and annual review of appropriateness) seem to provide an equivalent, or better, range of controls to mitigate distribution risk.
I think this position accurately reflects ASIC’s expectations. In RG 274 “Product Design and Distribution Obligations” ASIC note at 274.20 that
‘financial product’ refers to a product to which the design and distribution obligations apply: see s994AA and 994B(1). This includes:
(a) products for which a Product Disclosure Statement (PDS) must be prepared under Pt 7.9 of the Corporations Act (e.g. interests in a managed investment scheme, general insurance, and interests in a superannuation fund);
(b) securities for which a disclosure document must be prepared under Pt 6D.2 of the Corporations Act (e.g. hybrid securities), except for ordinary shares (unless the company is an investment company or intends the shares to be converted to preference shares);
(c) products that are not regulated under Pts 6D.2 or 7.9, but that are ‘financial products’ under Div 2 of Pt 2 of the Australian Securities and Investments Commission Act 2001 (ASIC Act) (see s994AA(1))—this includes credit facilities under the ASIC Act, such as credit contracts regulated under the National Consumer Credit Protection Act 2009 (National Credit Act) (e.g. credit cards, home loans, funeral expenses policies), and short-term credit not regulated under the National Credit Act;
(d) products prescribed by the Corporations Regulations as requiring a TMD, including:
(i) depository interests in simple corporate bonds (see reg 7.8A.05);
(ii) debentures of a body that is an authorised deposit-taking institution (ADI) or registered under s21 of the Life Insurance Act 1995 (see reg 7.8A.06);
(iii) basic banking products (as defined in the Corporations Act) (see reg 7.8A.07);
(iv) investor directed portfolio services (IDPSs) (see reg 7.8A.08);
(v) exchange traded products (ETPs) (see reg 7.8A.09); and
(vi) certain custodial arrangements (see reg 7.8A.10).
You’ll notice that Managed Discretionary Accounts are not specifically included in that list or by the Regulations. While I appreciate that they haven’t been specifically excluded, it seems overly cautious to include them in the regime “just in case”, particularly while ASIC continue to chide the industry for its conservatism.
In the absence of clarity, I understand why some might prefer to assume that they are subject to the DDO regime, but I’m not convinced by the rationalisations that, technically, an MDA is an unregistered managed investment scheme. MDAs are not required to issue PDS and it’s the PDS requirement (Part 7.9) that brings most issuers into the DDO regime.
I don’t believe there’s either a moral or legal reason to issue a Target Market Determination for an MDA and, further, I don’t think a TMD would in any way mitigate distribution risks (inappropriate recommendations and misrepresentation) better than the existing set of robust controls imposed by RG179.
Download RG274
Download RG179
2. Who issues the TMD?
SEAN
I don’t think a TMD needs to be issued for an MDA but, if one is required, it’s the MDA Provider on who this obligation should fall.
The adviser is the Distributor and would be required to, inter alia, take reasonable steps to comply with the TMD but the MDA Provider must prepare the TMD.
Their TMD must meet the content requirements in s994B(5) and:
- describe the class of consumers that comprises the target market for the product (see s994B(5)(b));
- specify any distribution conditions and restrictions on distribution (see s994B(5)(c));
- specify review triggers (events that reasonably suggest the TMD is no longer appropriate (see s994B(5)(d));
- specify when the first review of the TMD must occur (see s994B(5)(e), (6) and (7));
- specify when subsequent reviews of the TMD must occur (see s994B(5)(f), (6) and (7));
- specify reporting periods for when distributors should provide information about the number of complaints about the product to the issuer (see s994B(5)(g), (6) and (7)); and
- specify the kinds of information the distributors must report to the issuer (and how frequently) to enable the issuer to identify whether the TMD needs to be reviewed (see s994B(5)(h), (6) and (7)).
PETER
The AFSL which is the MDA Provider issues the TMD. Both the MDA Provider and its Distributors will be required to adhere as distributors.
Typically, advisers that are representatives of the MDA Provider and are recommending an MDA are distributors as well as Product Issuers, for example utilising Managed Investments Schemes (MIS) such as ETFs in their Investment Programs.
3. Does custody matter?
PETER
There is a strong argument when diving into RG-274 and its underlaying laws that only MDAs with custodial arrangements are considered product issuers for DDO purposes. I can’t see why it should make a difference with regards to MDAs other than that the law makers were referring to other products to capture or provide relief and as usual MDAs were stuck in a hybrid grey zone. When you look at custody and MDAs there are two different arrangements that I know of.
One, is where a regulated platform (the Custodian) is utilised to hold the assets and to perform all the required reporting.
The other, where the MDA Provider utilises the services of a broker which holds the client’s assets custodially. The Broker in this case is not a regulated platform.
In my opinion, neither arrangement makes sense to differentiate the adherence of having to provide a TMD.
SEAN
The idea of custody is only relevant in the absence of certainty.
Some experts take the position that, technically, an MDA is an unregistered managed investment scheme and, therefore, the operator has a beneficial interest in the assets held on trust for the investors. As a consequence, they argue, the MDA Operator is providing custody services (and therefore caught under the regulations).
Even if that is true, and I’m not convinced it is, I don’t think these incidental custody services fall under reg 7.8A.10.
4. Why should I issue a TMD?
SEAN
Personally, I don’t think Managed Discretionary Accounts require a Target Market Determination.
I don’t believe there’s either a moral or legal reason to issue a Target Market Determination for an MDA and, further, I don’t think a TMD would in any way mitigate distribution risks (inappropriate recommendations and misrepresentation) better than the existing set of robust controls imposed by RG179.
So, I don’t think you should issue a TMD and, in an environment of increasing compliance costs and multiplying bureaucracy, it’s neither reasonable nor required to do so.
As a general principle, compliance requirements are designed to protect and inform retail clients. A TMD is not a regulated disclosure document designed for, or distributed to, retail clients so consider the requirements, and your own risk appetite, before voluntarily assuming new obligations.
PETER
Since the regulations are ambiguous with regards to MDAs, I am recommending my clients protect their AFSLs and businesses appropriately. It will also give them peace of mind. They will be required to adhere to the new DDO distributor rules anyway and the TMD is just part of the challenge.
So, err on the side of caution.
5. Who can help me with this?
PETER
I know some groups who are seeking costly legal opinions to help them with their decision to provide a TMD. A legal opinion is just that and there is never a guarantee that a court of law or ASIC will agree with it.
If you decide to comply there are TMD templates in the market place however some have found these to be confusing and are designed more for SMAs and not MDAs.
If you are looking for a TMD that is specifically designed for MDAs then we at MDA Guru will be happy to help.
To DDO or not to DDO – TMDs for MDAs — MDA Guru
SEAN
Assured Support has an integrated legal practice, so if you need a legal opinion on which to base your response to the Design and Distribution Obligations, please reach out to Sean Graham or our Legal Practice Director, Cristean Yazbeck.
Even though I may disagree with Peter on some points, he’s certainly worth consulting to get a practical view of how many participants are reacting to these new requirements.
6. Who is Peter Turbach?
Peter has worked for more than 25 years in the financial services sector in both Canada and Australia and has been involved with all aspects of advising and operating MDA’s for the last 10 years.
Peter’s experience ranges from acting as chairman for investment committees to managing operations.
As an AFSL Responsible Manager (RM) specialising in MDA compliance and operations Peter takes a special interest in the ‘fintech’ and ‘regtech’ sectors and actively consults with start-ups in financial services and software.
When not working Peter can often be found on a baseball diamond or an ice hockey rink.
