Of all the reforms to financial sector regulation in the wake of the Hayne royal commission, the one that made the biggest impact in 2022 was the Design and Distribution Obligation, which gives ASIC power to stop the sale of a product if it sees evidence of mis-selling. The regulator has not been shy about using this power.
ASIC has issued stop orders on 21 occasions since it first used the power earlier this year and this month it took things to a new level when it commenced civil penalty proceedings against American Express for alleged breaches of the DDO.
In a recent note to clients, law firm King & Wood Mallesons said: “It is clear from ASIC’s statements that it is willing to take issue with how a product issuer defines a financial product’s target market or determines a product’s distribution conditions. ASIC is flexing its DDO powers.”
King & Wood Mallesons said the range of reasons given by the regulator for issuing stop orders include: the target market was too broad; the target market determination did not specify any distribution conditions or the distribution conditions were inadequate; the target market determination did not include required information, such as review periods; and investment companies did not prepare TMDs for share offers.
To make a stop order, ASIC must be satisfied that there has been a contravention of the DDO provisions.
It has stopped Responsible Entity Services from selling an investment product called PPM Unit, whose sole asset is a loan to a company related to RES for development of a sandstone quarry
The target market determination said the investment would be suitable for investors looking for a “core component in their investment portfolio.” But ASIC said the investment was a “high-risk, illiquid, unlisted single asset investment” and that RES had identified “a category of retail investors for whom investment in PPM Units would not have been consistent with their likely objectives.”
Last month, ASIC placed a stop order on a prospectus from a lender seeking funds through an issue of preference shares, concerned at deficiencies in its target market determination.
The lender, Finnia Income Ltd, an unlisted public company, was seeking $20 million to lend to real estate development projects. It was offering an interest rate of 8.15 per cent on redeemable preference shares with a six-year term.
ASIC said the target market determination did not adequately describe the objectives, financial situation and needs of consumers likely to be in the target market.
After issuing a series of stop orders, ASIC stepped things up when it took American Express to court, alleging breaches of its design and distribution obligations.
Amex issued two cards that were co-branded with retailer David Jones. Under the DDO, Amex was required to make target market determinations for the products and review them if it became aware of circumstances indicating the TMDs were no longer appropriate.
ASIC alleges that by early 2022 Amex was aware that the cancellation rates for consumers who applied for the cards in David Jones stores were high, and significantly higher than cancellation