How DDO will stifle advice APLs

Mike Taylor

Managing Editor and Publisher

9 September 2021

First it was the professional indemnity insurers who influenced the conservative shaping of Approved Product Lists (APLs) and now there is a growing industry consensus that the Government’s new Design and Distribution Obligations (DDO) regime will make APLs even more vanilla.

And the bottom line for funds management start-ups and boutiques is that their ability to earn inclusion onto the APLs of many financial planning licensees is about to become that much harder.

“The days of being easily able to accommodate small micro-cap or private equity funds on your APL are over,” the chief executive of a major licensee told Financial Newswire this week. “That’s because there is going to be a reluctance to step outside the benchmarks.”

Licensees have acknowledged that obtaining and retaining PI cover has played its own role in shaping APLs which has persuaded planning groups to specifically exclude some types of investments, including Managed Investments Schemes (MIS) and allowing access to direct shares outside the ASX 200.

This is hardly surprising in circumstances where PI underwriters have insisted on being provided with a licensee’s APL at the time of policy renewal.

“There is simply no reward for pursuing an aggressive APL and under DDO we’ll be looking towards a very disciplined approach,” the chief executive said.

The comments came as the major licensees began the process of fully informing their advisers of the new rules generated by DDO, including AMP Limited which on Tuesday issued documentation explaining Target Mark Determinations (TMDs) and the consequent obligations of advisers.

“As a product issuer, AMP must make a TMD for each open product and make this publicly available,” the AMP communication said.

“Advisers should (under general advice or execution only and for products where a TMD is required);

• take reasonable steps to distribute an AMP product in line with the TMD
• not distribute an AMP product where there’s no appropriate TMD in place or where we’ve advised you to stop distributing.

But while moving to ensure their businesses are fully prepared and compliant with the new regime, licensees told Financial Newswire that notwithstanding the specific carve-outs with respect to the provision of financial advice they remained uncomfortable with the levels of paperwork the new regime was imposing on them, particularly around six-monthly reporting.

For their part, fund managers have expressed concern at the impacts of the DDO regime, with one fund manager describing the regime as being the “answer to a question that was never asked”.

Premium China Funds Management’s Jonathan Wu said that the process of generating a TMD was both time-consuming and costly, and agreed that the process was likely to be even more so for start-up fund managers.

“I think the new regime definitely risks stifling innovation,” he said.