DDO Enforcement: ASIC issues first DDO stop orders

ASIC’s recent enforcement action in relation to the Design and Distribution (“DDO”) regime is a wakeup call for licensees who are issuers of financial products to retail clients. ASIC has used its powers to place interim stop orders on multiple financial firms, preventing these firms from issuing financial products to retail investors. ASIC’s enforcement activities in these cases focussed on Target Market Determinations (“TMD”) which were considered deficient.

ASIC’s Priorities

This enforcement action shows that ASIC’s focus has shifted from education regarding the DDO, to enforcing compliance. The financial firms that were the target of this enforcement failed to meet the DDO by:

  • failing to have a TMD in place; 
  • failing to adequately identify the consumers they intended to target;
  • failing to exclude certain categories of investors from the target market; and
  • failing to specify distribution conditions.

ASIC’s concern in these enforcement actions was that the products were made available to retail consumers for whom they were not appropriate, or too risky,  or that the firms were not suited to the objectives, financial situation and needs of all of the retail clients identified in the target market.

What Next?

Licensees that issue financial products to retail clients should consider these initial stop orders as a warning and review their product governance arrangements to ensure it properly addresses ASIC’s concerns in these cases.

ASIC has been clear that it considers that the industry has had sufficient time to educate itself regarding the DDO and that it will now proceed to use its powers and the penalties available to enforce these obligations.

Issuers of financial products should:

  • Ensure product governance arrangements are implemented and updated as required. Much of an issuer’s compliance with the DDO will be driven by its product governance arrangements:
    • Assess each existing retail product by considering:
      • the key attributes of the product
      • the consumer objectives, financial situation and needs for which the product is likely to be appropriate
      • the distribution arrangements for the product and determine whether they need to be reviewed and adjusted
      • any significant dealings in the product which may require the product to be redesigned or ceased
    • Assess each new retail product by:
      • identifying the class of consumers that are likely to have objectives, financial situation and needs which could be met by the product
      • ensuring the design of the product is driven by the identified target market
      • conduct robust testing of the product
      • determine how consumer outcomes will be measured and monitored
    • Identify all retail products offered or proposed to be offered
    • Consider your target market for each retail product, including any category of consumer that should be excluded from the target market
    • Develop a TMD for any new products and consider any amendments that may be required to existing TMDs.

ASIC’s DDO Enforcement Agenda

ASIC’s Corporate Plan for 2021 – 2025 identifies four strategic priorities, one being product design and distribution. ASIC’s focus is to supervise and enforce the DDO and the Corporate Plan states that ASIC will use the full extent of the powers provided to it to enforce compliance by licensees with the DDO.

ASIC’s focus on reducing the risk of harm to consumers which can be caused by poor product design means that they will increase enforcement activities in relation to non-compliance with the DDO and take action to disrupt poor conduct and prevent harm.

ASIC Deputy Chair, Karen Chester said:

“The design and distribution obligations were created to deliver better consumer outcomes. Under the law, firms must embed a consumer-centric approach. They need to design financial products that meet the needs of consumers in their intended target market, and distribute those products in a targeted way.”[1]

Background

The DDO regime came into effect on 5 October 2021. The DDO apply to a range of financial products under the Corporations Act 2001 (“Corporations Act”), ASIC Act 2001 (“ASIC Act”) and National Consumer Credit Protection Act 2009 (“NCCP Act”) and are intended to help consumers obtain appropriate financial and credit products by requiring issuers and distributors to have a consumer-centric approach to designing and distributing products.

Further reading

[1] ASIC Media Release

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