ASIC actions 1st DDO stop orders

Passed into legislation in 2019 and coming into effect on 5 October 2021, the design and distribution obligations (DDOs) require issuers and distributors to design financial products that meet the needs of consumers and to distribute these in a more targeted manner.

According to ASIC, the intention of these measures is to assist consumers to obtain appropriate financial products by ensuring issuers and distributors maintain a “consumer-centric approach” in the design and distribution of their products.  

Further, under these measures, ASIC is able to issue an interim stop order if the regulator is satisfied that there has been a breach of part 7.8A or section 994E of the Corporations Act 2001. 

In ASIC’s first use of these new powers, interim stop orders were issued to Responsible Entity Services Limited (RES), UGC Global Alpha Limited and UGC Global Alpha Fund Limited.

ASIC alleges that the three financial firms had deficiencies in their target market determination (TMD) for their products (a mandatory public document that sets out the class of consumers a financial product is likely appropriate for, setting out matters relevant to the product’s distribution and review).

According to ASIC, the three financial firms “did not appropriately identify the consumers they intended to target or did not have a TMD”. 

RES was issued a 21-day stop order on issuing interests in PPM Units, giving a product disclosure statement for PPM Units, or providing general advice to retail clients recommending investment in PPM Units.

RES’ TMD referenced investors intending to use an investment in PPM Units as a core component of their investment portfolio, as well as investors with “an objective of high capital growth or a mixture of capital growth and income”.

ASIC has said these categories of investors “would not have been consistent with their likely objectives, financial situation and needs”.

“ASIC notes that the sole underlying asset of the PPM Unit class is a loan to a company related to RES for development of a sandstone quarry. The product is a high-risk, illiquid, unlisted single asset investment,” the regulator said in a statement.  

“The return of an investor’s funds and any interest payable under the loan is wholly dependent on the related-party borrower’s ability to repay the loan.”

Further, the two UGC Global Group companies were issued stop orders after they both lodged prospectuses in May 2022 seeking to raise $100 million (each through the offer of ordinary shares for the purpose of investing in the UGC Alpha Global Fund), but neither had a TMD.

ASIC has added that any application to invest would be processed on a “first come, first served” basis.

Following an initial 21-day stop order, ASIC implemented an indefinite stop order on 11 July to “give the UGC companies more time to respond to ASIC concerns”. 

ASIC’s deputy chair, Karen Chester, commented that the regulator’s focus “has now shifted to compliance”. 

“Industry has had sufficient time to bed down its implementation of the DDO regime. We have targeted surveillances underway to check whether product issuers and distributors are complying with their design and distribution obligations,” she said.

Ms Chester added that ASIC “will continue to look at defective TMDs’, as well as “issuers who have not made TMDs or not made them publicly available”. 

“We will review how product issuers interact with their distributors to confirm they are not straying beyond their target market. We will also review how they monitor and review consumer outcomes to ensure consumers are receiving products that are consistent with their likely objectives, financial situation and needs,” Ms Chester said.

Ms Chester later said that financial firms need to be consumer-centric in how they design their products and issuers need to have clearly defined target markets that “take into account the risk that investors could lose some or all of their capital”. 

“We expect this to flow through to similarly clear distribution arrangements. Where firms are not meeting their obligations, ASIC can and will respond, from stop orders to court action, to prevent consumer harm and deter non-compliance,” Ms Chester said.

[Related: Financial regulators on watch for cracks in mortgage market]