TMD compliance burden surfaces

compliance TMD

Advisers are already experiencing additional compliance obligations brought about by the target market determination requirement under the new DDO rules.

The target market determination (TMD) requirement under the new design and distribution obligations (DDO) imposed on financial product providers is already proving to be a significant compliance burden for advisers.

The DDO rules were introduced on 5 October last year under which financial product issuers must include a written document that stipulates the class of consumers comprising the target market for a particular product.

However, according to specialist SMSF advisers the TMD is already having flow on compliance obligations for them should their clients be considered on the periphery of the specified target market.

“If you’re putting together a blended portfolio [for an SMSF] you might [include] a very aggressive Australian equities fund in there. It might be only a small portion of the [SMSF] but you’ve got to go through [the process] and if there is more than one red light or more than two orange lights and a green light you’ve got to report it,” Verante Financial Planning director Liam Shorte told attendees at the most recent SMSF Association Sydney Chapter lunch.

“[It means your] staff are [having] to get their heads around this and it’s really difficult,” he added.

Navwealth chief executive Craig Banning revealed the compliance procedures sometimes associated with a certain TMD situation is often disproportionate to the potential issue at hand.

“[I had a situation where] a retiree with a self-managed fund [who had] put a little bit of money, a tiny bit of money, into an Asian equity fund and [I thought] what does the TMD say about that. [It was] absolutely no way,” Banning explained.

“[The individual needed] income [and there was] very little income [from the fund]. So then you’ve got to ask what do I do now? So you’ve got write all of these file notes on why 3 per cent of the portfolio [allocated to] that fund is okay.

“But if you don’t write the file notes you’re in trouble and if you don’t go to your licensee, you’re in trouble. So it [translates into] another hour [spent] on one tiny, tiny element of an investment portfolio that I would have probably not thought was necessary.”

According to Shorte, it represents regulations put in place for past misconduct that has already been addressed.

“It’s really [resulted in] more and more compliance, the clients don’t see it [because] we don’t have to put these in front of the client, but it all has to be done in the background,” he concluded.

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