ASIC review identifies product issuer DDO shortcomings

Mike Taylor

Managing Editor/Publisher, Financial Newswire

4 May 2023

The Design and Distribution Obligations regime is well into its second year but investment product issuers are still falling short, according to the Australian Securities and Investments Commission (ASIC).

In a review of the regime, ASIC said it had found that a significant number of product issuers made deficient target market determinations (TMDs) with poorly defined target markets and unclear or inadequate product governance arrangements.

It was against this background that DDO interim stop orders had become a ‘go-to regulatory tool’, ASIC deputy chair, Karen Chester said.

“Investment product issuers have been on notice to meet the design and distribution obligations since October 2021. It is disappointing to see DDO deficiencies across the board, and by large and small product issuers alike.

“Poor product design or distribution puts retail investors at risk of financial harm, ending up in products that don’t meet their needs. The fact that we have issued 26 stop orders on investment products in just nine months shows that product issuers need to ‘lift their game’ – and now,” Chester said.

ASIC prioritised the initial review of investment products because of concerns that investors were being inappropriately exposed to high-risk products. The key target market deficiencies ASIC identified across investment product issuers include:

• 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; and
• unsuitable investment timeframes and/or withdrawal features, not reflecting the product’s risks and liquidity profile – a factor in 18 stop orders.

ASIC also identified inappropriate or no distribution conditions – a factor in 13 stop orders.

It said many of these deficiencies appeared when issuers relied on TMD templates without customising them appropriately.