ASIC has placed tentative stop orders on three financial firms in response to deficiencies in target market determination (TMD) for their products. These actions mark ASIC’s first use of stop order powers under Design and Delivery Obligations (DDOs), which took effect on October 5, 2021.
A TMD is a mandatory public document that defines the category of consumers for which a financial product is likely to be appropriate (the target market). It also defines issues relating to the distribution and review of the product. The three financial companies did not correctly identify the consumers they intended to target or did not have a TMD, which means that the products could otherwise have been marketed and sold to retail investors for whom they were not appropriate or too risky.
The interim stop orders prevent Responsible Entity Services Limited (RES) and two UGC Global (UGC) group companies from issuing the relevant managed investment program interest or shares to retail investors.
“The design and distribution bonds were created to provide better outcomes for consumers,” said ASIC vice president Karen Chester. “By law, businesses must incorporate a consumer-centric approach. They must design financial products that meet the needs of consumers in their target market and distribute these products in a targeted manner. When companies are not doing the right thing and there is a risk of harm to consumers, ASIC can now take quick action to disrupt misconduct and prevent harm,” Ms Chester said.
“ASIC’s focus has now shifted to compliance. The industry has had sufficient time to put in place its implementation of the DDO regime. We have put in place targeted monitoring to verify whether product issuers and distributors meet their design and distribution obligations. We will continue to review faulty TMDs, as well as transmitters that have not made a TMD or made it public. We will examine how product issuers interact with their distributors to confirm that they are not straying from their target market. We will also look at how they monitor and review consumer outcomes to ensure consumers are receiving products that are in line with their likely goals, financial situation and needs,” Ms Chester said.
“Financial companies need to be consumer-centric in the design of their products. Issuers should have clearly defined target markets, particularly for high-risk products, which take into account the risk that investors will lose some or all of their capital. We expect this to translate into equally clear distribution deals. When companies fail to meet their obligations, ASIC can and will respond, from stop orders to legal action, to prevent consumer harm and deter non-compliance,” Ms Chester said.
Responsible entity Services Limited
ASIC has issued an interim stop order preventing RES from issuing interest in the PPM units, giving a product disclosure statement for the PPM units or providing general advice to retail clients recommending investment in the PPM units. PPM units. The stop order is valid for 21 days unless revoked.
Given the characteristics of the product, ASIC considered that the TDG of RES included two categories of retail investors for whom an investment in PPM Units would not have been consistent with their likely objectives, financial situation and needs. These were: investors intending to use an investment in PPM Shares as the core of their investment portfolio and investors aiming for high capital growth or a combination of capital growth and of income.
ASIC notes that the only asset underlying the PPM unit category is a loan to a company linked to RES for the development of a sandstone quarry. The product is an investment in a single, high-risk, illiquid, unlisted asset. The return on an investor’s funds and any interest payable under the loan are entirely dependent on the ability of the related borrower to repay the loan.
ASIC reviewed TMD, product disclosure statements and online advertising for PPM units in a recent managed fund marketing watch (22-061MR). ASIC also recently issued an interim halt order on RES in connection with misleading or misleading statements in an online advertisement for PPM (22-188MR) units.
Companies of the UGC Global group
ASIC has issued interim stop orders preventing two UGC Global group companies, UGC Global Alpha Limited and UGC Global Alpha Fund Limited, from trading in shares in relation to retail investors, providing a disclosure document or to provide advice on financial products relating to equities to retail investors.
In May 2022, the two companies filed prospectuses seeking to raise $100 million each through the offering of common stock to invest in the UGC Alpha Global Fund (a wholesale fund). ASIC extended the exposure period of these prospectuses due to concerns that the disclosure was defective and placed interim stop orders (under Section 739) on offerings made under the prospectuses.
When the prospectuses were made public during the exposure period, they had no TMD and indicated that investment applications would be handled on a “first come, first served” basis. ASIC was concerned that UGC Global companies had engaged in retail product distribution before preparing a TMD for their high-risk offerings. Therefore, ASIC also issued orders for non-compliance under DDO with respect to the actions of these companies. The first DDO orders lasted 21 days. On July 11, new DDO orders were issued (for an indefinite period) to give UGC companies more time to address ASIC’s concerns.
UGC Global Alpha Limited and UGC Global Alpha Fund Limited are authorized representatives of United Global Capital Pty Ltd (AFSL 496 179). Stop orders are available on the ASIC’s supply display board.
Interim orders for all three companies have been issued urgently to protect retail investors and the companies will have an opportunity to make representations before any final stop orders are issued by ASIC.
ASIC’s Regulatory Guide 274 Product Design and Distribution Obligations (RG 274) assists issuers and distributors of financial products who need to comply with the design and distribution obligations of the Companies Act. Promoters of managed funds should ensure they are familiar with the principles and guidelines set out in RG 274.