ASIC DDO stop orders confirm why product manufacturers should fund CSLR

ANALYSIS

The financial adviser critics of the proposed funding arrangements for the Compensation Scheme of Last Resort (CSLR) should take heart from last week’s first Australian Securities and Investment Commission’s intervention in the Design and Distribution Obligations (DDO) regime.

ASIC announced that it had imposed interim stop orders on three financial firms to prevent them offering their financial products to consumers because of deficiencies in their target market determinations (TMDs).

What is important about the ASIC interim stop orders in the broader context of the funding regime for the CSLR is that products in question were headed direct from product manufacturer to consumer and highly unlikely to be intermediated by a financial adviser.

These were the ASIC descriptions of the products involved in the interim stop orders:

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.

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.

The good news is that ASIC’s efforts have been directed at the responsible product manufacturers – something which tends to reinforce the arguments being put forward by the Financial Planning Association (FPA), the Association of Financial Advisers (AFA) and the Association of Independently Owned Financial Professionals (AIOFP) that product manufacturers should pull their weight in funding the compensation scheme.