The corporate regulator’s move against three financial products last month marks the end of ASIC’s grace period for design and distribution obligations (DDO) and will begin to enforce the law that was introduced less than a year ago.
Late last month, ASIC placed interim stop orders on three financial firms because of deficiencies in target market determinations (TMDs) for their products.
The actions were ASIC’s first use of the DDO stop order powers which came into effect on 5 October 2021.
The interim stop orders prevent Responsible Entity Services Limited and two companies in the UGC Global Group from issuing the relevant managed investment scheme interests or shares to retail investors.
TMDs outline the clients specific products are suited for, but ASIC stated the products recommended by the named companies didn’t appropriately identify the consumers they intended to target.
Assured Support managing director Sean Graham says ASIC move focused on short-term credit, contracts for difference and binary trading options.
“It’s hard to argue about the detriment of those type of products. Most of these issues don’t involve financial planners or professional advisers. Binary options and CFDs are speculative investments generally done without advice by people who think they can either beat the market or get a better return than is reasonable.”
Easing in
QMV Legal senior associate Gabriela Pirana says ASIC was quite vocal about having a grace period for firms to consider the implementation and allow entities to develop and enhance their compliance.
“But what we’ve seen with these stop orders is that ASIC essentially says now that period is over, and you should have sufficient time to implement changes,” Pirana says.
Pirana says the regulator has now moved into a compliance period where there is active surveillance over how entities are complying with producing TMDs.
She added ASIC never stated how long the grace period would last and was likely purposely being ambiguous because they did not outline a transition period. Engaging with interim stop orders will now be the first step.
“From there onwards they’ll hold a hearing and if the lack of compliance isn’t remedied, they can go as far as to issue an actual stop order which prevents the issuance of these products for an indefinite period of time.”
Graham says the industry has long complained the regulator hasn’t acted against these types of products.
“[ASIC is] not blaming advisers for these sorts of things. It’s a product or market issue and [the regulator plans to] deal with them effectively and quickly.”
Finding use
Earlier in the year ASIC stated to a PJC committee it was still trying to best navigate how to use its product intervention powers while the industry was going through the grace period after Red October.
In the media release announcing the interim stop orders, ASIC deputy chair Karen Chester said the regulator’s focus has firmly 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 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.”
Chester reiterated the need for financial firms to be consumer-centric in product design and issuers must have clearly defined target markets, particularly for high-risk products.
“We expect this to flow through to similarly clear distribution arrangements,” she said. “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.”
