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ASIC takes Firstmac to court over alleged DDO breaches

In its first DDO civil penalty action against a distributor of financial products, ASIC is taking Firstmac to court for allegedly breaching design and distribution obligations.

The financial regulator has commenced a civil penalty action in the Federal Court against Firstmac Limited for alleged breaches of the design and distribution obligations (DDO) relating to its registered managed investment scheme, Firstmac High Livez (High Livez).

DDO requires firms to design financial products that meet the needs of consumers and to distribute those products in a more targeted manner.

A target market determination (TMD) — a public document that sets out the class of consumers that a financial product is likely to be appropriate for (target market) and other matters relevant to the product’s distribution and review — is a mandatory requirement of the DDO.

Firstmac is therefore required to take reasonable steps to ensure that it distributes financial products consistent with the TMD for each product.

The non-bank distributes term deposits and other investment products, including interests in High Livez.

In its action, ASIC alleges 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.

md discover

Under the rules, product issuers are responsible for making TMDs for financial products. Perpetual Trust Services Limited is the issuer of High Livez.

However, 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.

According to the regulator, 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.

It suggested this was because:

  • Unlike Firstmac’s term deposits, which were guaranteed by the Commonwealth government in the amount of 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 time frames for term deposits ranged from 30 days to two years, whereas the recommended investment time frame for High Livez was a minimum of three years up to five years. The TMD indicated that customers seeking an investment time frame of two years or less were not in the target market.

ASIC is seeking declarations and pecuniary penalties from the court. 

Speaking of the action, 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,” Ms Court said.

A Firstmac spokesperson said: “Firstmac takes its regulatory obligations seriously,” adding that it was “considering the matters raised in the proceedings filed by ASIC and has no further comment at this stage.”

ASIC’s proceeding against Firstmac is the first DDO civil penalty action taken against a distributor of financial products. 

It follows ASIC’s first DDO Court action filed earlier this month against a financial product issuer, American Express Australia (Amex), regarding credit cards issued in David Jones stores.  

ASIC also recently flagged that lenders issuing small amount credit contracts (SACCs) frequently lacked detailed descriptions of their products and target markets.

The areas of concern highlighted by ASIC were:

  • Product descriptions: ASIC found that in most cases, these definitions were insufficient at describing key features and attributes of the specific product.
  • Defining target markets: The descriptions used of consumer classes were “too broad to be meaningful”. Credit issuers are at risk of breaching their obligations if they don’t provide enough detail when describing their target market, it said.
  • Setting trigger reviews: Trigger reviews were also found to be too broad and “unlikely to lead to reviews of TMDs where a review would be appropriate”.

Speaking last week, ASIC commissioner Sean Hughes stated: “All TMDs reviewed featured at least one of the shortfalls we identified.

“While SACC lenders have made changes to address the concerns identified, we expect all lenders to review their TMDs and product governance arrangements to ensure that they are complying with all of their obligations under the law.

“The nature of the DDO regime requires lenders to make continued improvements and refinements to their TMDs or products as they identify and respond to poor consumer outcomes resulting from these loans.”

ASIC actioned its first DDO interim stop orders earlier this year against three financial firms (Responsible Entity Services Limited, UGC Global Alpha Limited and UGC Global Alpha Fund Limited) after it was alleged that the firms had deficiencies in their TMDs for their products.

[Related: Intervention improves small credit lenders’ TMDs: ASIC report]


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