ASIC urges investment product issuers to meet their design and distribution obligations
The Australian Securities and Investments Commission (ASIC) today called on investment product issuers to step up their efforts after an initial review found significant room for improvement in how they meet their design and distribution obligations (DDO).
The DDO, now into its second year, marks a significant shift to outcomes-based regulation. Ultimately, it requires financial products to be designed and distributed with clear and contemporary consideration of the objectives, financial situation and needs of the consumers and retail investors being targeted.
ASIC undertook an initial, risk-based review of how investment product issuers are meeting the DDO. The review found that a significant number of the product issuers made deficient target market determinations (TMDs), with poorly defined target markets and unclear or inadequate product governance arrangements.
ASIC prioritised the initial review of investment products because of concerns that investors were being inappropriately exposed to high-risk products. The key target market deficiencies ASIC identified across investment product issuers include:
- target markets defined too broadly – a factor in 15 stop orders;
- unsuitable investor risk profiles used – a factor in 21 stop orders;
- inappropriate levels of portfolio allocation used – a factor in 10 stop orders; and
- unsuitable investment timeframes and/or withdrawal features, not reflecting the product’s risks and liquidity profile – a factor in 18 stop orders.
The regulator also identified inappropriate or no distribution conditions – a factor in 13 stop orders.
Many of these deficiencies appeared when issuers relied on TMD templates without customising them appropriately.
As a result, ASIC placed interim stop orders on 26 investment products from 18 issuers since 1 July 2022, representing $6.6 billion in funds invested by retail investors. These actions by ASIC resulted in 12 issuers amending 18 TMDs to address the deficiencies and five issuers withdrawing seven products.
ASIC also reviewed the product design arrangements of 12 issuers of around 640 registered managed investment schemes to check how they met the ‘reasonable steps’ and TMD review obligations. ASIC found a prolific use of investor questionnaires to meet the ‘reasonable steps’ obligation without a clear underlying governance and distribution framework. While all issuers had arrangements to meet their TMD review obligations, they needed to use review triggers more effectively and improve their processes upon a review trigger.