Unpacking the personal advice DDO carve-out
Financial advisers that provide personal advice may not need to comply with the obligation to take reasonable steps to comply with the Target Market Determination (TMD) in theory, according to a regulatory lawyer.
Speaking on a Stockbrokers and Financial Adviser Association (SAFAA) webinar, regulatory lawyer Corey McHattan, partner at Ashurst, said personal advice providers complying with best interest duties were effectively complying with Design and Distribution Obligations (DDO) in practice.
Personal advisers that wished to provide suitable products outside of a TMD to a client would still need to be careful about getting documentation right in case obligations needed to be proven in court later.
McHattan said a carve-out had been introduced by the Australian Securities and Investments Commission (ASIC) addressing the concern that the obligation to question whether a client was within the target market for a product would constitute personal advice.
The carve-out allowed advisers to ask for information solely to determine whether a person was in the target market then inform the person whether they were or were not in the TMD.
“But then the problem is how do you prove that you’re using that information solely for that purpose?” McHattan asked.
“I’ve had a lot of discussions with the Australian Securities and Investments Commission (ASIC)… and it’s still not entirely clear to me.”
McHattan said the safest approach was to ring fence the information and only use it for TMD interpretations and not for any other purpose like marketing.
“That may seem like overkill, but to me, that's really the only way you can be confident you can rely on the carve-out,” he said.
“Otherwise, you do run the risk that the client will come along and say well, ‘but I answered all these questions, I thought the issuer or distributor was going to take into account my particular situations and needs’.”
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