ASIC has commenced civil penalty action in the Federal Court against Firstmac Limited, a financial product distributor, for alleged breaches of the design and distribution obligations (DDO).
ASIC’s proceeding against Firstmac is the first DDO civil penalty action taken against a distributor of financial products. This follows ASIC’s first DDO Court action filed earlier this month against a financial product issuer, Amex, regarding credit cards issued in David Jones stores.
Firstmac distributes term deposits and other investment products, including interests in Firstmac High Livez (High Livez), a registered managed investment scheme.
Under the DDO, Firstmac is required to take reasonable steps to ensure that it distributes financial products consistent with the target market determination (TMD) for each product.
ASIC alleges that in marketing and distributing High Livez to term deposit holders, Firstmac failed to take reasonable steps to ensure that the product was distributed in accordance with the TMD.
It is ASIC’s case that by adopting a cross-selling strategy of marketing and distributing High Livez to term deposit holders, there was a likelihood that those customers would be outside the High Livez target market, because:
- unlike Firstmac’s term deposits which were guaranteed by the Commonwealth Government in the amount up to $250,000 per account, High Livez was not a capital guaranteed product. The TMD indicated that customers seeking a capital guarantee were not in the target market; and
- the investment timeframes for term deposits ranged from 30 days to two years whereas the recommended investment timeframe for High Livez was a minimum of three years up to five years. The TMD indicated that customers seeking an investment timeframe of two years or less were not in the target market.
ASIC Deputy Chair Sarah Court said ‘ASIC is concerned that Firstmac’s term deposit customers were exposed to the risk that they might obtain a financial product that was not appropriate to their needs and objectives.
‘Under the design and distribution obligations, issuing and distributing financial products now requires a consumer-first mindset with genuine consideration of the likely objectives, financial situation and needs of consumers being targeted. The TMD needs to be reviewed and applied when developing marketing and distribution strategies to prevent consumer harm.
‘ASIC is committed to reducing the risk of harm to consumers caused by poor product design, distribution and marketing, especially by driving compliance with design and distribution obligations,’ concluded Ms Court.
ASIC is seeking declarations and pecuniary penalties from the Court.
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Background
Firstmac is a non-bank lender and the investment manager of High Livez with an Australian Credit Licence and AFS Licence. ASIC alleges in its action that Firstmac sent High Livez material to 817 Firstmac term deposit customers between 5 October 2021 and 9 September 2022 and failed to take steps to ensure this occurred in accordance with the TMD. Perpetual Trust Services Limited is the issuer of High Livez. Under the DDO provisions, product issuers are responsible for making TMDs for financial products.
This is the first proceeding against a distributor to go before the Federal Court concerning DDO. ASIC’s first DDO action against an issuer, American Express Australia, was announced on 6 December 2022 (22-338MR).
DDO requires firms to design financial products that meet the needs of consumers, and to distribute those products in a more targeted manner. A TMD is an important requirement under DDO. It is a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (target market) and matters relevant to the product’s distribution and review.
ASIC has targeted surveillances underway to check whether product issuers and distributors are complying with DDO. Where firms are not doing the right thing, ASIC can take quick action under DDO to disrupt poor conduct and prevent potential consumer harm.
Editor's note 1:
A case management hearing has been listed for 14 February 2023.
Editor's note 2:
The initial case management hearing was held on 14 February 2023 before Downes J of the Federal Court. The date for the next case management hearing will be in May or June 2023 to be determined by the Court.
Editor's note 3:
A case management hearing has been listed for 31 May 2023 before Justice Downes.
Editor's note 4:
An earlier case management hearing has been listed for 10 May 2023.
Editor's note 5:
The Court has listed the matter for a hearing on liability commencing on 4 December 2023 for five days before Justice Downes.
Editor's note 6:
On 17 October 2023, the hearing on liability commencing on 4 December 2023 was vacated. The matter has been listed for a hearing on liability for five days commencing on 29 April 2024.
Editor's note 7:
A case management hearing has been listed for 3 April 2024 before Justice Downes.