The Australian Securities and Investments Commission has used its stop order powers under the Design and Distribution Obligation for the first time, ordering three firms to stop issuing their investment products.
Responsible Entity Services Ltd and two companies in the UGC Global Group are the subject of the orders. ASIC said there were deficiencies in their target market determinations.
Under DDO, financial services companies are required to identify the target market for any product that requires a disclosure document and must design the product for that market. They have to select appropriate distribution channels and periodically review those arrangements to ensure they continue to be appropriate.
The scheme is aimed at reducing the harm of mis-selling by requiring issuers to design products for which an appropriate target market can be identified.
Issuers are required to consider the likelihood of a product being appropriate for the retail clients in the target market: that is, whether it is likely to be consistent with the likely objectives, financial situation and needs of retail clients.
Relevant factors in this consideration include a product’s complexity, risk profile and fees, as well as investors’ likely understanding of product features, their capacity to meet their obligations or bear losses.
DDO obligations do not apply to sales of financial products on secondary markets.
DDO was implemented in October last year. ASIC deputy chair Karen Chester said in a statement that industry has had enough time to put DDO compliance in place and the regulator is switching to compliance mode.
Chester said: “We have targeted surveillance underway to check whether product issuers and distributors are complying with their obligations. We will continue to look at defective target market determinations, as well as issuers that have not made TMDs or not made them publicly available.”
In the case of Responsible Entity Services, the sole asset of its PPM Unit is a loan to a company related to RES for development of a sandstone quarry, which ASIC described as “high-risk, illiquid, unlisted single asset investment”.
The target market determination said the investment would be suitable for investors looking for a “core component in their investment portfolio”. ASIC said this was “a category of retail investors for whom investment in PPM Units would not have been consistent with their likely objectives”.
In the case of the UGC Global Group companies, prospectuses were made publicly available when no TMDs had been prepared.
In the banking industry, the DDO has had its biggest impact on the distribution of hybrid securities. The big banks have all issued capital notes this year and all have changed their distribution arrangements.
Applications cannot be made directly to the bank but must be made through a syndicate broker. Retail investors must obtain personal advice from a financial planner.