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DDO deficiencies ‘across the board’ for product issuers: ASIC
Financial product issuers are broadly missing the mark in their design and distribution obligations (DDO) and need to “lift their game”, the Australian Securities and Investments Commission (ASIC) warned after a compliance review found “across the board” deficiencies in issuers’ marketing to investors.
Citing “considerable room for improvement” in issuers’ compliance with DDOs, including in the target market determinations (TMDs) they prepare to ensure their financial products are properly marketed to the appropriate consumer class, the regulator said it has issued 26 stop orders on investment products since July.
“Investment product issuers have been on notice to meet the design and distribution obligations since October 2021,” ASIC deputy chair Karen Chester said. “It is disappointing to see DDO deficiencies across the board, and by large and small product issuers alike.”
The DDO regime requires issuers and distributors of financial products to “ensure products are designed with consumer needs in mind and distributed in a targeted manner”, ASIC said. To meet their DDOs, issuers must prepare a TMD, take “reasonable steps” to ensure financial products reach consumers identified in the TMD and monitor consumer outcomes.
The agency’s May 3 report details its initial review of issuers’ DDO compliance, focussing on investment products including interests in managed investment schemes, shares issued by investment companies, preference shares and debentures. “We focussed on investment products because we were concerned that consumers risked being inappropriately exposed to high-risk products,” it said.
As a result of the review, ASIC said, it issued 26 interim stop orders against 18 issuers for breaches of TMD requirements; 12 issuers have since amended their TMDs, and five have withdrawn them. The report noted that many of the issues arose due to issuers’ use of TMD templates without customising them appropriately.
“The design and distribution obligations are a ‘game changer’ for consumers and retail investors,” Chester said.
“Companies need to take a consumer-centric mindset across a financial product’s lifecycle,” she added. “The DDO interim stop orders have become a ‘go-to regulatory tool’ for ASIC to quickly disrupt and stem poor consumer outcomes.”
“Poor product design or distribution puts retail investors at risk of financial harm, ending up in products that don’t meet their needs. The fact that we have issued 26 stop orders on investment products in just nine months shows that product issuers need to ‘lift their game’ – and now.”
The most common issue that arose in the regulator’s review was the use of inappropriate risk profiles in the target market, a factor in 21 stop orders. “For example, a high-risk product was considered to be appropriate for consumers with a medium risk tolerance,” the report said.
Issuers defining a target market too broadly factored into 15 stop orders; other deficiencies included applying inappropriate levels of portfolio allocation in a target market and having inappropriate or no distribution conditions.
“Closer scrutiny of DDO is coming,” Chester said.
“In coming months, ASIC will begin to review how product issuers interact with their distributors to ensure they are not straying beyond their target market, how they monitor product governance arrangements and review data to ensure retail investors are receiving suitable products on an ongoing basis,” she added. “We won’t hesitate to take further action, from stop orders through to court proceedings, especially where we see egregious failures.”
