ASIC's first enforcement on DDO: What you need to know

In a landmark first, ASIC has taken enforcement action against three financial firms for failing to comply with their design and distribution obligations (DDO). On 28 July 2022, ASIC announced that it had placed interim stop orders on all three firms for either preparing deficient, or failing to make, target market determinations (TMDs). See here for ASIC’s media release.

As we have previously written (see here), the DDO regime took effect on 5 October last year and was intended to drive better consumer outcomes by requiring issuers and distributors to place retail consumers at the center of their product governance arrangements. The regime introduces obligations that apply to both issuers and distributors of a financial product, which require them to embed a consumer centric approach to their business models by ensuring that financial products are targeted to the appropriate class of retail consumers. As the cornerstone of this new regime, the TMD is required to be made publicly available at no charge. At a high level, the regime mandates issuers to disclose in their TMDs the class of consumers comprising the target market for a particular product. This determination must be based on the common objectives, financial situation and needs of the intended class of consumers. It is expected to inform all stages of the product life cycle including product design and distribution. Broadly speaking, distributors of the financial product are obligated to take reasonable steps to ensure that the financial product reaches its target market.

Two of the firms that interim stop orders were issued against (which both belong to the same corporate group) sought to raise capital through offering ordinary shares for investment. ASIC found that they failed to have in place a TMD within the prospectuses at the time high risk financial products were on offer. The firms are now subject to interim stop orders for an indefinite period of time.   

In the third case, ASIC found that while the financial firm had prepared a TMD, it inappropriately captured two classes of consumers whose likely objectives, financial circumstances and needs would not have aligned with the features of the relevant financial product. The target market was broadly described as:

• investors who intend to use the product as a core component of their investment portfolio; and
• investors with an objective of high capital growth or a mixture of capital growth and income.

ASIC found that the TMD was inappropriate given that the financial product was a “high risk, illiquid unlisted single asset investment”. It is not unusual for there to be regulatory scrutiny around investment funds which have single-asset or non-liquid investment strategies. However, this action demonstrates that ASIC now has a broader toolkit with which to seek to support appropriate investor outcomes. As a result, ASIC issued an interim stop order which is valid for 21 days (unless revoked).

Key takeaways

• ASIC’s focus has now clearly shifted to pursuing enforcement outcomes in addressing failures to comply with DDO. ASIC has stated the industry has had sufficient time to “bed down its implementation of the DDO regime”. ASIC has emphasised its willingness to use stop orders and commence court actions to address non-compliance and prevent consumer harm.  
• This is a stark reminder for issuers and distributors to review (or revisit) whether the DDO regime is applicable to them, and if so, whether they have robust processes and practices in place to ensure compliance. It is expected that high risk financial products which are made available to retail investors are more likely to be scrutinised by ASIC. Of note as well is that the first DDO stop orders have been placed on investment fund related products.
• Issuers should ensure that they appropriately identify the target market for a financial product and conduct regular reviews to ensure that the TMD remains appropriate at all times, having regard to the evolving circumstances, vulnerability and needs of particular classes of retail consumers as well as a potentially low growth and high inflation outlook for the economy. They should, in particular, carefully consider how they are describing the intended target market and the potential consequences of including overly broad descriptions.