Australia: ASIC Reports on DDO Compliance by Investment Product Issuers

By Kane Barnett and Bernard Sia

On 3 May 2023 the Australian Securities and Investments Commission (ASIC) released its review on compliance by investment product issuers of the Design and Distribution Obligations (DDOs). In ASIC’s view, there is still considerable room for improvement by product issuers.

In the time since its commencement in October 2021, ASIC has issued 26 interim stop orders for breaches of the DDOs target market determination (TMD) requirements. Additionally, ASIC has commenced two civil penalty proceedings for alleged breaches of DDOs.

The latest report (which can be read here) examined the DDOs in relation to investment product issuers citing a concern that consumers risked being inappropriately exposed to high-risk products. The report outlines ASIC’s observations and highlights the aspects of the DDOs most in need of improvement by investment product issuers. The most prevalent factors cited as causes of the stop orders included:

  • defining a target market too broadly;
  • inappropriate risk profiles being used in the target market;
  • including inappropriate levels of portfolio allocation in a target market;
  • inappropriate intended investment timeframes and/or withdrawal needs in the target market;
  • inappropriate or no distribution conditions; and
  • inappropriate use of a TMD template.

The stop orders and civil penalty proceedings show an increasing willingness by the regulator to take action. This is especially so where ASIC considers there are poor consumer outcomes.

ASIC also said that in the coming months it 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. Further, ASIC noted that further stop orders are under consideration and several other DDO-related investigations underway,

Investment product issuers are being encouraged to read the report, assess their practices, and address any gaps informed by the report’s findings.

For further information on the DDOs, see our previous posts here and here.

Copyright © 2023, K&L Gates LLP. All Rights Reserved.