DDO breach rulings against non-insurers have relevance for industry
Two Federal Court decisions handed down this month over design and distribution obligations (DDO) breaches by non-bank lender Firstmac and American Express have relevance for the insurance industry, McCabes principal Mathew Kaley says.
In both cases, the Australian Securities and Investments Commission launched court actions alleging DDO rules have not been followed.
On July 10 the court ruled that Firstmac broke DDO rules by sending product disclosure statements for an investment product to 780 existing term deposit customers between October 5 2021 and September 9 2022. The lender was a distributor of the product at the time.
Justice Kylie Downes found the business failed to take reasonable steps, as required by DDO legislation, to ensure its distribution conduct was consistent with the target market for the product.
Mr Kaley says the case outcome provides some useful guidance on what is required for insurers and insurance product distributors to meet the distribution requirements set out in section 994E of the Corporations Act.
Mr Kaley told insuranceNEWS.com.au the court outcome demonstrated the importance of having “embedded and effective” processes in place to screen whether a retail product will be distributed to its defined target market.
One of the key takeaways for insurers and distributors from the case relates to Justice Downes’s interpretation of the meaning of “reasonable steps”, Mr Kaley says.
The DDO provision states that a person who makes a target market determination (TMD) for a financial product must take reasonable steps that will, or are reasonably likely to, result in retail product distribution conduct being consistent with the target market set out in that document. Distributors of the product have a similar obligation.
“Retail product distribution conduct includes providing advice and giving a PDS to a retail client, along with any dealings in the product,” Mr Kaley said. “[The justice’s] findings include that all steps taken to comply with section 994E must occur before those things are done.
“This point, in particular, may warrant some consideration for insurers as it follows that it is not enough to put reasonable steps in place to stop someone who is outside of the target market from acquiring a product.
“There must also be reasonable steps in place before any retail product distribution conduct is engaged in with that person.”
In the American Express case, the business was ordered to pay $8 million in penalties for breaching DDO laws in relation to two co-branded credit cards which were primarily distributed to customers in David Jones stores.
The court ruled last week that Amex broke the laws as a credit card issuer from May 25 to July 5 2022 for two reasons.
First, Amex ought to have known high cancelled application rates reasonably suggested that the TMDs for the cards were no longer appropriate, and second, it failed to stop issuing the credit cards when it had not reviewed the TMDs.
Mr Kaley says the ruling sends an important message about the need for effective product governance processes for monitoring, assessing and acting promptly on potential review triggers, with the risk that significant penalties can flow from a failure to do so.
“In our view, this is the key learning from the decision,” he said. “The establishment of reasonable review triggers and an effective process for monitoring, assessing and acting promptly on those is a key part of the DDO.
“Product issuers need to have their process for this part of the DDO documented in a product governance framework or similar document and must ensure it is being applied effectively in practice.
“Amex did design and document a process however, in this case at least, was not applying it effectively in practice.”