First DDOs stop order powers used on three firms

On Thursday, ASIC announced it has placed interim stop orders on three financial firms due to deficiencies in the target market determination (TMD) for their products.

The interim stop orders prevent Responsible Entity Services Limited (RES) and two companies within the UGC Global Group (UGC) from issuing the relevant managed investment scheme interests or shares to retail investors.

“The three financial firms did not appropriately identify the consumers they intended to target or did not have a TMD, which meant the products may have otherwise been marketed and sold to retail investors for whom they were not appropriate or too risky,” ASIC said.

The corporate regulator confirmed that the actions were its first use of stop order powers provided under the design and distribution obligations (DDOs) which took effect last year.

“Under the law, firms must embed a consumer-centric approach. They need to design financial products that meet the needs of consumers in their intended target market, and distribute those products in a targeted way,” said ASIC Deputy Chair Karen Chester.

“Where firms are not doing the right thing and there is potential for consumer harm, ASIC can now take quick action to disrupt poor conduct and prevent harm.”

ASIC’s stop order against RES, which is valid for 21 days unless revoked, prevents it from issuing interests in PPM Units in the RES Investment Fund, giving a product disclosure statement for PPM Units or providing general advice to retail clients recommending investment in PPM Units.

It has also placed an interim stop order on RES in relation to misleading or deceptive statements in an online advertisement for the PPM Units that suggested an investor would acquire equity in Pleasure Point Mine Pty Ltd.

“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,” it said.

“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.”

The sole underlying asset of the PPM Unit class, the regulator said, is a loan to a company related to RES for development of a sandstone quarry.

ASIC described the product as “a high-risk, illiquid, unlisted single-asset investment”.

Meanwhile, interim stop orders against UGC Global Alpha Limited and UGC Global Alpha Fund Limited prevent them 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.

According to the regulator, the two companies lodged prospectuses in May seeking to raise $100 million each through the offer of ordinary shares for the purpose of investing in the UGC Alpha Global Fund 

ASIC said it had extended the exposure period for these prospectuses due to concerns that the disclosure was defective and placed interim stop orders 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,” the corporate regulator explained.

“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.”

While the first DDO orders lasted for 21 days, further DDO orders were made for an indefinite period to provide UGC with more time to respond to ASIC’s concerns.

“Financial firms need to be consumer-centric in how they design their products. Issuers need to have clearly defined target markets, especially for high-risk products, that take into account the risk that investors could lose some or all of their capital,” said Ms Chester.

“We expect this to flow through to similarly clear distribution arrangements. Where firms are not meeting their obligations, ASIC can and will respond, from stop orders to court action, to prevent consumer harm and deter non-compliance.”

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.