Where are funds going wrong under DDO?
The Australian Securities and Investments Commission (ASIC) has outlined the most common mistakes made by funds in their target market determinations (TMDs) as well as how many have been withdrawn from the market.
DDO required firms to design financial products that met the needs of consumers and were distributed in a targeted manner. Under this, a TMD was needed to set out the class of consumers for whom a financial product was appropriate.
ASIC had enforcement powers that could serve interim stop orders if a fund was not meeting its appropriateness requirements under DDO.
Since DDO was introduced in October 2021, ASIC has made 26 interim stop orders, most recently to three funds run by BT Advance. Orders were valid for 21 days unless revoked earlier and ASIC said it had revoked 23 of the orders issued.
Some 18 TMDs had been positively amended to address the deficiencies and seven products had been withdrawn.
In the latest report from ASIC, the regulator said the most common mistakes made by firms were:
- 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;
- Unsuitable investment time frames and/or withdrawal features, not reflecting the product’s risks and liquidity profile – a factor in 18 stop orders; and
- Inappropriate or no distribution conditions – a factor in 13 stop orders.
Karen Chester, ASIC deputy chair, said: “Closer scrutiny of DDO is coming. All investment product issuers should read our report, assess their practices, and address any gaps informed by our findings. In the coming months, ASIC 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.
“We won’t hesitate to take further action, from stop orders through to court proceedings, especially where we see egregious failures. We have already commenced civil penalty proceedings for alleged DDO breaches against a distributor of an investment product and an issuer of a credit product. We have further stop orders under consideration and several other DDO-related investigations underway.”
Managed investment schemes
ASIC completed a review of TMDs for 3,650 managed investment schemes (MISs) and then further assessed 75 schemes. Separately, 12 issuers of MISs were selected for a review of their product oversight, distribution and review arrangements, varied by funds under management and investment type.
MISs were specifically singled out for their “prolific use” of investor questionnaires to meet the “reasonable steps” obligation as well as their use of TMD templates in a “cookie-cutter” approach. Some 19 of the interim stop orders placed on investment products were managed investment schemes.
“Many issuers have implemented practices to assist them in meeting the reasonable steps obligation (e.g. conducting appropriate due diligence on third-party distributors and putting in place supervisory arrangements to provide oversight of compliance with the obligation).
“The use of investor questionnaires to meet this obligation is prolific. Investor questionnaires alone are insufficient and must be supported by a broader governance and distribution framework.
“All issuers had arrangements for meeting their review obligations, but issuers could improve on their use of review triggers and the process undertaken to conduct a review.”
Other problems included failing to design products with consumers in mind and scheme features being tested in comparison with other products/benchmark rather than on an “absolute” basis.
On the other hand, good practices by MIS issuers included involving key senior staff in their product and TMD development processes, running a stress test on a scheme and actively engaging with distributors and being mindful of conflicts of interest with them.
AUTHOR
Laura Dew
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