ASIC secures first DDO prosecution against Firstmac
The Australian Securities and Investments Commission has secured its first successful Design and Distribution Obligations (DDO) prosecution with the Federal Court finding against Firstmac Limited.
ASIC said the Federal Court had found that Firstmac Limited breached the DDO provision by failing to take reasonable steps that would have resulted in, or would have been reasonably likely to have resulted in, the distribution of one its investment products being consistent with its target market determination (TMD) for the product.
At odds for Firstmac was its cross-selling strategy, with ASIC saying the court found the company implemented a ‘cross-selling strategy’ of marketing investments in its High Livez investment product to 780 consumers who held existing term deposits with Firstmac.
“In doing so, it breached its design and distribution obligations (DDO) when it sent product disclosure statements (PDS) for the Firstmac High Livez product to those existing term deposit holders, without first taking reasonable steps to ensure consistency with its TMD for the product. The conduct occurred between from October 2021 to September 2022,” the ASIC statement said.
Commenting on the outcome, ASIC Deputy Chair Sarah Court said “ASIC took this case because we were concerned that customers were exposed to the risk they might obtain a financial product that was not appropriate to their needs and objectives”.
“This should act as a deterrent to anyone engaged in cross-selling financial products who fails to consider their design and distribution obligations before sending product disclosure statements,’ Court said.
In handing down the judgment, Justice Downes noted Firstmac failed to take reasonable steps to ensure the distribution of the High Livez PDS to term deposit holders was consistent with the target market determination.
The Court found the steps which Firstmac took were wholly inadequate to meet the statutory obligation imposed by the DDO legislation.
Her Honour said, “it is self-evident that [there] were suitable and available ways to eliminate or minimise the likelihood that the High Livez PDS would be sent to a person who fell outside the target market for High Livez”.
ASIC will now seek orders from the Court imposing pecuniary penalties against Firstmac Limited. The proceedings have been listed for a case management hearing on 19 July 2024.
Wait till they start targeting Licensees or individual advisers for giving TMD’s that are “high risk” to investors, and the investor will sit in front of a judge and swear blind they never ever wanted to invest in anything high risk, have never done so in their lives. They will get every adviser on this, as nearly all managed fund TMD’ state they are high risk. Watch this space.
Dear Anon,
I don’t know how long you’ve been in the financial advice arena, but you have always had an obligation to understand the risk appetite and time frames for investing by the client.
Here’s the rub, you have always been obligated to point out in your SOA the risks associated with any investment recommendation including inflation risk.
And finally, I think you should consider doing a client risk profile on each client about every 3 years to see how clients perceive themselves, if they were to lose money.
The easy question to ask is, in the event of that happening, would they pull an investment that had lost 20.0% or more in one year and go to cash,
or would they wait to see if things got better, or would they buy more of that investment?
I can assure you when you do a second risk profile questionnaire and compare it to your initial one, many of the client responses change.
It’s really up to you if you want to take the risk and get the potential outcome you’ve espoused.
I think you are missing the point. Anon (and many others) view DDO as yet another ambiguous tool that can be used as a “gotcha” against advisers in the event a complaint arises, irrespective of how well they’ve done their jobs.
It doesn’t matter how well you explained the advice and risks, or how often you completed a risk profile questionnaire, if a complaint arises because an investment fell then the adviser is at real risk and an investor can simply throw their hands up and say “well I didn’t understand”.
These laws have become so overly convoluted that it’s almost impossible to be 100% sure you’ve met every obligation because there is so much in-built ambiguity. The logical risk management response would be to have everyone invested far too conservatively which would see another risk arise, underperformance of the investments.
Another instance of ASIC throwing resources at inconsequential issues while Australians get scammed out of billions of dollars.
DDO is a complete waste of time and arose from a report written in 2014 (from memory) to address issues that were already dealt with by subsequent changes to the industry in the intervening 9 years to DDO’s introduction. It was nothing more than an attempt for the coalition Gov of the time to look like they were passing laws and being tough on the advice sector.
If ASIC had any sense they’d ignore it or push it to the very bottom of their pile and focus on the big risks facing Australians. I shudder to think of the taxpayer funded (adviser funded?) hours put into these issues instead of more relvant issues impacting everyday people.