Design and Distribution Obligations (DDO)

Key takeaways

• DDO has applied since 5 October 2021 and covers most credit products.
• A target market determination (TMD) is a public document you can read.
• Distributors must collect and report information on outcomes to the issuer.
• It is a product-level obligation - it sits alongside, not instead of, responsible lending.

What problem was DDO built to solve?

Responsible lending and personal advice obligations both operate at the level of the individual consumer. DDO operates one level up, at the product itself.

The regime responds to a repeated pattern in which products were designed and sold to people they were never suitable for - complex products distributed broadly, high-cost credit marketed to consumers with no capacity to repay. Asking whether each individual sale was appropriate turned out to be an inefficient way to prevent it.

So DDO asks the issuer a prior question: who is this actually for? And then requires distribution to match that answer.

What is in a target market determination?

A TMD is a public document. If you want to know whether a product is designed for someone like you, you can read the issuer's own answer.

Review triggers are the interesting part. A spike in hardship applications, complaints or early arrears in a product is a signal that the target market was wrong, and the issuer is obliged to reconsider.

How does it affect a broker or a borrower?

For a distributor - which includes brokers - the obligations are practical: take reasonable steps so that distribution is consistent with the TMD, keep records, and report significant dealings outside the target market and complaints data back to the issuer.

For a borrower, the effect is mostly invisible but occasionally decisive. If you fall outside a product's target market, a broker should not be putting you into it even if you would qualify on serviceability. That can feel like an arbitrary refusal, and it is worth asking the broker to explain which part of the TMD you sit outside.

ASIC has been active in this area, including issuing stop orders where target market determinations were deficient - which is why the documents have become considerably more specific than they were at commencement.

Frequently asked questions

What is a target market determination?

A public document in which a product issuer describes the class of consumers the product is appropriate for, the conditions on how it may be distributed, and when the determination will be reviewed. Issuers must make TMDs publicly available.

When did DDO start?

The design and distribution obligations commenced on 5 October 2021 and apply to most financial products including a broad range of credit products.

Does DDO replace responsible lending?

No. They operate at different levels - DDO governs product design and distribution to a class of consumers, while responsible lending governs the assessment of an individual application. Both apply.

Can I be declined because of DDO?

You can be told a particular product is not available to you because you sit outside its target market, even if you would meet the credit criteria. Ask which aspect of the TMD you fall outside - a different product may suit.

Related reading

• Responsible Lending After the Royal Commission
• APRA, ASIC, RBA and the ACCC: Who Regulates What
• NCCP Marketing Rules: What Brokers Can and Cannot Claim

Sources

• Product design and distribution obligations (RG 274) — ASIC
• Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 — Commonwealth of Australia