ASIC imposes first DDO stop orders as it focuses on DDO compliance

The Financial Services Regulatory team
29 Jul 2022 Time to read: 3 MIN

With the first use of its stop order powers under the recent Design and Distribution Obligations regime, ASIC has sent a clear message to industry that its focus is now on compliance.

The recently introduced Design and Distribution Obligations (DDOs) were introduced to help consumers obtain appropriate financial products by requiring issuers and distributors to have a consumer-centric approach to designing and distributing products.

The DDOs require an issuer of financial products to consider the design of the relevant product (including its key attributes) and to determine an appropriate target market for the product. This target market, together with any distribution conditions, and information related to review and monitoring is required to be set out in a document called a “target market determination” (TMD). The TMD must be prepared and made available before engaging in “retail product distribution conduct”.

It is no surprise then that ASIC's first interim stop orders relating to DDO is in respect of financial firms who have not appropriately identified the consumers they intended to target or otherwise did not have a TMD (meaning that the financial products could have been marketed and sold to retail clients for whom they are not appropriate or too risky).

ASIC has also used this time to warn the industry that it has now moved its focus to compliance, with target surveillances underway to check whether product issuers and distributors are complying with their DDOs. In particular, ASIC will be focusing on:

  • defective TMDs;
  • issuers who have not made TMDs or not made them publicly available;
  • how product issuers interact with their distributors to confirm they are not straying beyond their target market;
  • how product issuers monitor and review consumer outcomes to ensure consumers are receiving products that are consistent with their likely objectives, financial situation and needs.

Stop Orders

ASIC placed interim stop orders on three financial firms, Responsible Entity Services Limited (RES) and two companies in the UGC Global Group (UGC). The stop orders relevantly prevent these companies from issuing interests in the relevant management investment scheme or shares to retail clients.

Responsible Entity Services Limited

ASIC examined the TMD, product disclosure statements (PDS) and online advertising for a class of units to be issued in the RES Investment Fund (PPM Units) as part of ASIC's recent surveillance into the marketing of managed funds (22-061MR). In addition to placing an interim stop order on RES in relation to misleading or deceptive statements in an online advertisement for PPM Units, ASIC has now also issued an interim stop order preventing RES from issuing interests in the PPM Units, giving a PDS for the PPM units or providing general advice to retail clients recommending investment in PPM units for 21 days (22-188MR).

Relevantly, ASIC considered that RES’ TMD included two categories of retail investors for whom investment in PPM units would not have been consistent with their likely objectives, financial situation and needs including investors who were using the risky RES PPM units as a core component of their portfolio and investors with an objective of high capital growth or mixture of capital growth and income.

ASIC considered the RES PPM Units were high risk and illiquid as the sole underlying asset of the investment was a related company loan for the development of a sandstone quarry.

UGC Global Companies

In May 2022, two UGC Global companies lodged prospectuses seeking to raise $100 million each through an offer of ordinary shares in those companies for the purposes of investing in the UGC Alpha Global Fund. ASIC extended the exposure period for these prospectuses given its concern that the disclosure was defective and placed an interim stop order for 21 days.

These prospectuses did not have a TMD and said applications to invest would be processed on a “first come first served” basis. ASIC held concerns that the UGC Global companies may have engaged in a retail distribution before preparing a TMD for their high risk offering. A further DDO stop order was made for an indefinite period.

The companies will have the opportunity to make submissions to ASIC before a final stop order is made.

Key takeaway

ASIC believes that the industry has had sufficient time to come up to speed with the DDOs, and has made it clear that ASIC can and will respond with action such as stop orders or even court action to prevent consumer harm and deter non-compliance.

The most recent stop orders demonstrate that the identification of a target market, and the preparation of a TMD is not simply a tick box exercise but rather, genuine and careful consideration must be given by product issuers and distributors to ensure that their financial product offerings are consistent with their customers' likely objectives, financial situations and needs.

Please contact our Financial Services team who can assist in reviewing compliance with your regulatory obligations.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.