The Australian Securities and Investments Commission (ASIC) has been strict in monitoring compliance with the new product design and distribution obligations (DDO), which were introduced on 5 October 2021. Under these DDO obligations, issuers are required to design financial products to meet consumer needs and distribute their products in a clearly-defined, targeted manner.
To date, seventeen DDO interim stop orders have been issued by ASIC. Nine interim stop orders have been lifted after ASIC’s concerns were addressed by the entities or where the products were withdrawn, and six remain in place.
When have interim stop orders been issued?
ASIC has made interim stop orders on target market determinations (TMD) after deeming them to be deficient for various reasons, including:
- Failing to prepare a TMD for an offer
- Inadequate description of distribution conditions in the TMD, which did not meet the appropriateness requirements under the DDO obligations
- A TMD failing to satisfy content requirements under Part 7.8A of the Corporations Act 2001 (Cth) – for example, omitting information in regard to review triggers for the TMDs, and also, reporting periods
- Specifying a target market that is too broad, failing to adequately identify target consumers or failing to exclude certain categories of investors from the target market
ASIC’s reasons for making these interim orders are generally to prevent poor conduct and protect retail investors from investing in a financial product that may not be aligned with their financial needs, situation or goals.
Arising from ASIC’s DDO obligation enforcement, financial product issuers should:
- Understand the target market: Issuers should have a clearly-defined understanding of the class of consumers that they intend to target.
- Review TMDs: TMDs should be stringently reviewed to ensure that they meet the content requirements prescribed by the Corporations Act 2001 (Cth) including testing TMDs against the areas of ASIC’s interim stop orders concerns.
- Consistency with Product Disclosure Statement (PDS): Issuers should ensure that their TMD is consistent with the PDS, in particular the risks of the product as stated in the PDS, and any other marketing materials associated with the offer.
- Understand the consequences of breaching DDO obligations: Issuers should be conscious that ASIC is prioritising its ongoing surveillance to ensure compliance with DDO obligations. Receiving an interim stop order from ASIC could result in needing to withdraw a product from market, negative publicity, and/or reputational damage for the issuer.
Feel free to reach out to any of the lawyers named in this alert or your usual contacts at Baker McKenzie with any queries you have about the compliance and risk management regimes required by the financial services laws and any improvements on processes your business may need.