The Australian Securities and Investments Commission (ASIC) has released its regulatory guide on the complex product design and distribution obligations following further consultations this year.

Acting Chairman Karen Chester says the obligations are a “game changer” and should assist industry to deliver better consumer outcomes, while managing non-financial risks and avoiding costly remediation.

“The obligations require firms to set their own boundaries to suit their business, products and customers,” she said today.

“If they stay within these boundaries this will mean less enforcement action from ASIC and the opportunity for deregulatory initiatives over time.”

The Insurance Council of Australia and the National Insurance Brokers Association have both been critical previously about how the laws will apply in practice for the insurance sector.

The legislation, which take effect from October 5 next year, requires issuers to define retail product target markets. Both issuers and distributors must then take “reasonable steps” to ensure buyers are within the intended market.

Insurers have raised questions over requirements for annual policy renewals under the new rules, and the sector has called for greater clarity on a number of issues.

The regulatory guide says insurers should analyse the possibility a consumer may fall out of a target market, and take into account circumstances that would increase the risk, such as after a fourth or fifth renewal.

“When an insurer assesses that it is likely that a consumer is no longer in the target market for an insurance policy, an insurer need not decline to renew the policy, but would need to take reasonable steps to direct the consumer to a policy that is likely to be appropriate,” it says.

The regulatory guide says distributors should have controls to ensure, for example, that someone who would be excluded from coverage under an insurance policy does not proceed to purchase the cover.

“A distributor is not taken to have failed to take reasonable steps merely because a consumer who is not in the target market for the financial product acquires the product,” ASIC says.

“However, a distributor must have effective systems and processes in place that are reasonably likely to avoid this result.”

The guide says under the obligations asking extra questions to see if someone is in a target market doesn’t constitute personal advice, but distributors mustn’t imply they have considered a consumer’s personal objectives or financial situation and needs, or that the product is suitable for their individual circumstances.

Issuers should be contacted by distributors if it appears there’s significant demand for a product from outside intended target markets, suggesting some change needs to be made.

“Distributors must collect information about the financial products they distribute and ensure that this information flows back to the products’ issuers,” the guide says.

Ms Chester says the guidance is principles-based to reflect that industry is best placed to implement the obligations, while also reflecting their broad application across all financial services sectors.

Regulatory Guide 274 is available here.