Product Disclosure Statements and when your business must give one

If your business issues, sells or recommends financial products to ordinary individuals in Australia, you will usually have to give each of those customers a Product Disclosure Statement (PDS). It is not an optional marketing document. It is a statutory disclosure obligation that sits at the centre of how most financial products are sold to retail clients in this country.

This guide sets out who the obligation falls on, the triggers that bring a business within it, the specific duties a PDS imposes, and what can go wrong when disclosure is inadequate. Much of the detail lives in Part 7.9 of the Corporations Act 2001 (Cth) and in ASIC's regulatory guidance, so this is an overview of the obligations you need to plan around rather than legal advice for your particular product.

Who the obligation applies to

The starting point is a distinction the Act draws between retail clients and wholesale clients. A financial product or service is provided to a person as a retail client unless one of the exceptions in section 761G of the Corporations Act 2001 (Cth) applies. The PDS regime is built entirely around the retail client. If you only ever deal with wholesale or sophisticated investors, a PDS may not be required, but that classification needs to be assessed properly because misclassifying a customer is risky.

The obligation is triggered by two kinds of conduct, each set out in its own provision:

• Recommendation situations: Under section 1012A, if you give personal advice to a retail client that recommends they acquire a particular financial product, you must give them a PDS for that product at or before the time the advice is given.
• Issue situations: Under section 1012B, if you offer to issue a financial product to a person, offer to arrange its issue, or issue the product, a PDS obligation generally arises.

The identity of who must act depends on their role. The issuer prepares the PDS. Distributors, authorised representatives and others who deal with retail clients must make sure the current PDS is provided at or before the point of issue or offer. In practice, product issuers and anyone who distributes to retail clients both need to know where the PDS obligation sits in their particular chain.

The products caught are broad. Managed investment scheme interests, superannuation products, life and general insurance, derivatives and a range of other products issued to retail clients all fall within the regime. If your business is setting up to offer any of these, it is common to map the PDS obligation at the same time as you scope your Australian Financial Services Licence (AFSL) and its authorisations, because the two are intertwined.

Preparing a PDS that meets the content requirements

The substantive duty is in section 1013C, which requires a PDS to include the statements and information set out in sections 1013D and 1013E.

Section 1013D sets out the main content requirements. A PDS must include whatever a person would reasonably require, as a retail client, to decide whether to acquire the product. That includes:

• the name and contact details of the issuer (and seller, for a sale Statement);
• information about significant benefits, when they arise and how they are provided;
• information about significant risks associated with holding the product;
• the cost of the product, ongoing amounts payable after acquisition, and any fees, expenses or charges deducted;
• details of commission or similar payments that affect returns;
• other significant features, and the rights, terms, conditions and obligations attaching to the product;
• how complaints are handled and how the dispute resolution system can be accessed;
• general information about significant taxation implications;
• details of any cooling-off regime; and
• how other information about the product can be accessed.

On top of those express items, section 1013E imposes a general obligation to include any other information that might reasonably be expected to have a material influence on the decision of a reasonable retail client whether to acquire the product. This is a deliberately broad catch-all, and it is why a PDS cannot be treated as a fill-in-the-blanks form. What is "material" depends on the product, and the draftsman has to make a genuine judgement about what a retail investor would want to know.

Section 1013F provides a counter-balancing limitation: information need not be included if it would not be reasonable for a retail client to expect to find it in the Statement. The exercise is therefore one of judgement about the product's nature, risk profile and how it is promoted.

ASIC's regulatory guidance, principally RG 168, directs that a PDS be clear, concise and effective. The information must actually be understood by the retail audience it is aimed at, not merely included. Boilerplate that buries the risks or the fees fails the substantive test because it does not equip the reader to compare products and make an informed decision.

Giving the PDS at or before the point of sale

A PDS only complies if it is given in time. In both a recommendation situation under section 1012A and an issue situation under section 1012B, the PDS must be given at or before the time the advice is provided or the product is issued. There are limited exceptions in the Act, for example for certain superannuation products, certain general insurance phone-quote situations, and some products where the customer has expressly asked for immediate handling, but these are exceptions and must be checked against your specific fact pattern before you rely on them.

For distributors, the practical point is that the current version of the PDS must be in the customer's hands before they commit. If a distributor hands over an out-of-date PDS, or none at all, the distributor as well as the issuer can be exposed.

Keeping disclosure up to date

A PDS is not a one-time document. If information in it becomes misleading or out of date, you can no longer keep relying on it for new sales, and you may need to act.

Under section 1014A, a Supplementary PDS (SPDS) is used to correct a misleading or deceptive statement, correct an omission of required information, or update or add to the information in the PDS. It must be titled as a Supplementary Product Disclosure Statement at the front, must identify the PDS it supplements, and must state that it is read together with that PDS. In some circumstances a replacement PDS may be prepared instead.

There are also ongoing obligations that sit alongside the PDS. A holder of products must usually be given ongoing information about the product and any significant matters as they arise. Good practice is to keep a review calendar and an event trigger list, so that a change to fees, features or risk profile prompts a check of whether an SPDS or a new PDS is required before any further retail sales take place.

Aligning the PDS with the wider compliance framework

A PDS never operates in isolation, and several related obligations commonly bite at the same time:

• Design and Distribution Obligations (DDO): Under Part 7.8A of the Corporations Act, retail distribution generally requires a Target Market Determination (TMD) that describes who the product is suitable for and the distribution conditions. The TMD and the PDS must be consistent and kept up to date.
• Financial Services Guide (FSG): An FSG explains the services a provider offers, how the provider is paid and its dispute resolution arrangements, whereas a PDS is product-specific. Many businesses need both.
• Marketing consistency: Promotional material must not be misleading or deceptive, which engages section 18 of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010 (Cth)). Ads, landing pages and sales scripts must be consistent with the PDS and must not overstate benefits or hide risks.
• Complaints handling: A PDS must describe how complaints are dealt with, which links to your internal dispute resolution process and, where relevant, the Australian Financial Complaints Authority (AFCA).

Consequences of getting it wrong

The obligations carry real teeth. Contravening section 1012A or 1012B is a civil penalty provision under the Corporations Act, which means ASIC can seek a declaration of contravention and a pecuniary penalty through the courts. Beyond the penalties, ASIC can take stop-order and other regulatory action against a defective disclosure document, and a customer who suffers loss may pursue compensation.

Two further consequences are worth flagging. First, if a PDS is misleading or omits material information, the business may also face exposure under the misleading or deceptive conduct provisions of the Australian Consumer Law, which carry their own remedies. Second, the reputational and practical cost of a compliance failure a regulator flags or a customer complains about can be more damaging to an early-stage product than the penalty itself, because the business often has to redo its disclosure and rebuild its onboarding processes.

A practical compliance checklist

Work through these checks as part of your product launch and ongoing compliance review, and keep a record of the outcomes:

• Confirm whether you are dealing with retail or wholesale clients under section 761G, and record that assessment.
• Map your products against the recommendation and issue situations in sections 1012A and 1012B to confirm whether a PDS is required.
• Draft the PDS against the section 1013D items and the section 1013E catch-all, tested against the retail client's reasonable expectations under section 1013F.
• Follow ASIC's clear, concise and effective standard in RG 168, and check the document with someone who is not close to the product.
• Give the current PDS at or before advice or issue, and ensure distributors hold and provide only the current version.
• Prepare a TMD under the DDO where you distribute to retail clients, and keep it consistent with the PDS.
• Reconcile marketing, sales scripts and onboarding screens against the PDS so nothing is misleading or inconsistent.
• Set a review calendar and event trigger list, and issue an SPDS or new PDS when information becomes out of date.

When the drafting judgement is worth legal help

The content of a PDS is not a compliance add-on you bolt on at the end. It requires a genuine judgement about what information a reasonable retail client needs, which sections 1013D, 1013E and 1013F ask you to make about your specific product. Getting that judgement wrong is how most PDS problems start.

A lawyer who works in financial services law can help you confirm which products fall within the regime, determine whether your customers are retail or wholesale, draft the PDS to the statutory and ASIC standard, and build the supporting TMD, FSG and complaints framework around it. Because the PDS must be consistent with your AFSL authorisations and your distribution model, it is usually worth scoping the disclosure obligations at the same time you develop the licence and the product, rather than after the product has launched.

The update that catches most issuers out

The duty most often missed is not the one-time drafting. It is the ongoing obligation to keep the PDS current. Many businesses treat the PDS as finished once it is published, then keep selling on it for months after a fee, feature or risk has changed. That is precisely the gap that a Supplementary PDS under section 1014A exists to close, and precisely the gap a regulator or a customer complaint will expose.

If you take one thing from this guide, put a review calendar and an event trigger list in place before you publish your first PDS. Decide now who owns the check, what events prompt a review, and how quickly an SPDS or a new PDS will be prepared. The document that stays accurate is the one that keeps you out of trouble, and the one that goes stale is the one that gets you into it.