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22-194MR ASIC’s first DDO stop orders to prevent offer of financial products to consumers
ASIC has placed interim stop orders on three financial firms in response to deficiencies in the target market determination (TMD) for their products. These actions are ASIC’s first use of the stop order powers under the design and distribution obligations (DDOs), which took effect on 5 October 2021.
A TMD is a mandatory public document that sets out the class of consumers a financial product is likely appropriate for (the target market). It also sets out matters relevant to the product’s distribution and review. The three financial firms did not appropriately identify the consumers they intended to target or did not have a TMD, which meant the products may have otherwise been marketed and sold to retail investors for whom they were not appropriate or too risky.
The interim stop orders prevent Responsible Entity Services Limited (RES) and two companies in the UGC Global Group (UGC) from issuing the relevant managed investment scheme interests or shares to retail investors.
‘The design and distribution obligations were created to deliver better consumer outcomes,’ ASIC Deputy Chair Karen Chester said. ‘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. Where firms are not doing the right thing and there is potential for consumer harm, ASIC can now take quick action to disrupt poor conduct and prevent harm,’ Ms Chester said.
‘ASIC’s focus has now shifted to compliance. Industry has had sufficient time to bed down its implementation of the DDO regime. We have targeted surveillances underway to check whether product issuers and distributors are complying with their design and distribution obligations. We will continue to look at defective TMDs, as well as issuers who have not made TMDs or not made them publicly available. We will review how product issuers interact with their distributors to confirm they are not straying beyond their target market. We will also review how they monitor and review consumer outcomes to ensure consumers are receiving products that are consistent with their likely objectives, financial situation and needs,’ Ms Chester said.
‘Financial firms need to be consumer-centric in how they design their products. Issuers need to have clearly defined target markets, especially for high-risk products, that take into account the risk that investors could lose some or all of their capital. We expect this to flow through to similarly clear distribution arrangements. Where firms are not meeting their obligations, ASIC can and will respond, from stop orders to court action, to prevent consumer harm and deter non-compliance,’ Ms Chester said.
Responsible Entity Services Limited
ASIC issued an interim stop order preventing RES from issuing interests in PPM Units, giving a product disclosure statement for PPM Units or providing general advice to retail clients recommending investment in PPM Units. The stop order is valid for 21 days unless revoked.
Given the features of the product, ASIC considered that RES’s TMD included two categories of retail investors for whom investment in PPM Units would not have been consistent with their likely objectives, financial situation and needs. These were: investors intending to use an investment in PPM Units as a core component of their investment portfolio and investors with an objective of high capital growth or a mixture of capital growth and income.
ASIC notes that the sole underlying asset of the PPM Unit class is a loan to a company related to RES for development of a sandstone quarry. The product is a high-risk, illiquid, unlisted single asset investment. The return of an investor’s funds and any interest payable under the loan is wholly dependent on the related-party borrower’s ability to repay the loan.
ASIC examined the TMD, product disclosure statements and online advertising for PPM Units as part of a recent surveillance into the marketing of managed funds (22-061MR). ASIC also recently placed an interim stop order on RES in relation to misleading or deceptive statements in an online advertisement for PPM Units (22-188MR).
Companies in the UGC Global Group
ASIC made interim stop orders preventing two companies in the UGC Global Group, UGC Global Alpha Limited and UGC Global Alpha Fund Limited, from dealing in shares in relation to retail investors, providing a disclosure document or providing financial product advice in relation to the shares to retail investors.
In May 2022, the two companies lodged prospectuses seeking to raise $100 million each through the offer of ordinary shares for the purpose of investing in the UGC Alpha Global Fund (a wholesale fund). ASIC extended the exposure period for these prospectuses because of concerns that the disclosure was defective and placed interim stop orders (under s739) on offers made under the prospectuses.
When the prospectuses were made publicly available during the exposure period, they did not have a TMD and said that applications to invest would be processed on a ‘first come, first served’ basis. ASIC was concerned that the UGC Global companies may have engaged in retail product distribution before preparing a TMD for their high risk offers. Therefore, ASIC also made orders for non-compliance with obligations under DDO in relation to the shares of these companies. The first DDO orders lasted for 21 days. On 11 July, further DDO orders were made (for an indefinite period) to give the UGC companies more time to respond to ASIC concerns.
UGC Global Alpha Limited and UGC Global Alpha Fund Limited are corporate authorised representatives of United Global Capital Pty Ltd (AFSL 496 179). The stop orders are available on ASIC’s Offer Notice Board.
The interim orders for all three firms have been made on an urgent basis to protect retail investors and the firms will have an opportunity to make submissions before any final stop order is made by ASIC.
ASIC’s Regulatory Guide 274 Product Design and Distribution Obligations (RG 274) assists issuers and distributors of financial products that must comply with the design and distribution obligations in the Corporations Act. Promoters of managed funds should ensure they are familiar with the principles and guidance set out in RG 274.
Editor’s Note 1:
Following a hearing on 9 August 2022, ASIC made an indefinite interim stop order against RES prohibiting the same conduct covered by the initial interim stop order. RES proposed amendments to its TMD, which addressed ASIC’s concerns by excluding certain categories of investors from the target market. As a result, on 10 August 2022, ASIC revoked the indefinite interim stop order and no final stop order was made.
Editor's note 2:
On 9 November 2022, UGC Global Alpha Limited lodged a supplementary prospectus, withdrawing its offer of shares under the original prospectus document. The offer made by UGC Global Alpha Fund Limited (under the prospectus lodged on 4 May 2022) remains subject to interim orders imposed under s739 and s994J of the Corporations Act.
Editor's note 3:
UGC Global Alpha Fund Limited lodged a supplementary prospectus on 21 December 2022, withdrawing its offer of shares under the original prospectus document.