ASIC’s proposed “Product design and distribution obligations”. 

Will this regime shape Australian managers’ approach to distribution in New Zealand?

In December 2019 the Australian Securities and Investments Commission (ASIC) asked for feedback on Consultation Paper 325 titled “Product design and distribution obligations”.

The proposed obligations flow from the Australian Royal Commission and, if adopted, are designed to ensure products aren’t being miss-sold.  Managers will need to establish a robust product governance framework that, amongst other things, identifies the target market for their financial product.  They will also need to “critically assess the product” (and its features) relative to the likely objectives, financial situation and needs of consumers for whom the product would likely be targeted.

The new rules could be interesting for Australian unit trusts distributed to New Zealand investors under the Mutual Recognition regime. Tax slippage for New Zealand investors in Australian Unit Trusts can arise from a number of sources.  These include no tax offset for non-resident withholding tax on foreign sourced dividends, non-tax deductibility of management fees (a quirk of the New Zealand Fair Dividend Regime calculation methodology), and tax on Australian sourced income.  In total tax leakage can weigh heavily on the net of tax return Kiwi investors receive.

To date Australian managers have not needed to think too hard about these issues. Under the Mutual Recognition regime, they simply need to provide a generic warning that Kiwi investors should seek tax advice before investing. Given the cost and complexity of tax advice, few Kiwi investors appear to have ever bothered with getting this, rather they opt for assuming “she’ll be right” given the funds are available to them under NZ regulations.

It is this type of situation the proposed Australian rules appear designed to address – being where a consumer willingly buys a fund, even though it may not be in their interests to do so.  The new rules explicitly note that issues like tax should be considered by Australian managers.

Another notable feature of the proposed obligations is that managers must publish their target market considerations.  This in itself is extremely interesting, as investors (and competitors) will be able to see what managers have taken into account (like tax considerations) to determine which investors fall inside and outside of their target market.

IIS has a significant vested interest in how Australia’s proposed “Product design and distribution obligations” play out.  Clearly where managers launch well-structured tax efficient PIE funds it will be easy for them to make the case to ASIC that New Zealand investors fall within their target market segment.  For now, managers should be aware of this potential change in the distribution landscape.

ASIC consultation closed in March 2020 and any new obligations will come into effect in April 2021.