The Federal Court has ordered Australian Unity Funds Management Limited to pay a $7.125 million pecuniary penalty for breaching design and distribution obligations (DDO) by failing to confirm the suitability of one of its products for retail investors.

As responsible entity of the Australian Unity Select Income Fund (Fund), Australian Unity admitted that it failed to take reasonable steps to ensure that interests in the Fund were only distributed to investors who matched the criteria outlined in its three Target Market Determinations (TMDs) for the Fund.

As a result, hundreds of retail investors were able to invest in the Fund even though the product may not have been suitable for them under those TMDs.

Australian Unity, also known as AUFM, admitted that it issued interests in the Fund to retail clients:

• on 89 occasions without requiring them to submit, as part of their application, a completed questionnaire with answers to questions to determine whether they were within the target market described in the Fund TMDs, and
• on 239 occasions without reviewing submitted questionnaires that had been completed by them to determine whether they were within the target market described in the Fund TMDs.

In this case, of 328 non-advised investors who applied to acquire an interest in the Fund, 89 were not required to submit a questionnaire to assess their suitability. Of the other 239 who did submit responses, up to 144 of them provided at least one response that suggested they were not in the target market for the Fund.

His Honour Justice Moshinsky said in his reasons published today that Australian Unity’s ‘failings are serious. Moreover, there is no satisfactory explanation for how they came about.

“The explanation is essentially that the person tasked with ensuring compliance with the DDO regime (the DDO Project Manager) did not have appropriate experience or training.

This reflects poorly on the ‘compliance culture’ of AUFM at the time. It suggests that AUFM did not take its regulatory obligations sufficiently seriously”.

Elsewhere, His Honour observed that specific investors identified in the judgment:

‘…were exposed to the risk that they might have obtained a financial product that was not appropriate to their objectives, financial situation or needs, and to the risk of financial loss’.

In addition to the pecuniary penalty, the Court has ordered that Australian Unity publish a written adverse publicity notice and send the notice directly to the last known email or postal address of impacted investors, being those who were either not required to submit a completed questionnaire as part of their application, or whose submitted questionnaires were not reviewed by Australian Unity and included at least one response which indicated that they were not in the target market for the Fund.

Australian Unity has also been ordered to pay ASIC’s costs of these proceedings.