ASIC urges investment product issuers to improve compliance with DDO obligations

A review undertaken by the Australian Securities and Investments Commission (ASIC) has determined that there is significant room for improvement in how investment product issuers are meeting their design and distribution obligations (DDO). 

The DDO regime, which is now in its second year, requires financial products to be designed and distributed with clear and contemporary consideration of the objectives, financial situation, and needs of the consumers and retail investors being targeted.

In a statement on Wednesday, ASIC said that it had prioritised an initial review of how investment product issuers were meeting the DDO requirements due to concerns that investors are being inappropriately exposed to high-risk products.

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

“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,” said ASIC deputy chair Karen Chester.

“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.”

The key target market deficiencies ASIC identified as part of its review included:

• 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; and
• inappropriate or no distribution conditions – a factor in 13 stop orders.

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

ASIC has placed interim stop orders on 26 investment products from 18 issuers since 1 July last year, representing $6.6 billion in funds invested by retail investors. These actions resulted in 12 issuers amending 18 TMDs to address the deficiencies and five issuers withdrawing seven products.

The findings of ASIC’s review and the actions taken by the regulator to date are outlined in Report 762 Design and distribution obligations: Investment products.

Ms Chester warned that closer scrutiny of DDO is on the horizon and called on all investment product issuers to read the regulator’s report, assess their practices, and address any gaps informed by the findings.

“In coming months, ASIC will begin to review how product issuers interact with their distributors to ensure they are not straying beyond their target market, how they monitor product governance arrangements and review data to ensure retail investors are receiving suitable products on an ongoing basis,” she said.

‘We won’t hesitate to take further action, from stop orders through to court proceedings, especially where we see egregious failures. We have already commenced civil penalty proceedings for alleged DDO breaches against a distributor of an investment product and an issuer of a credit product.  

Additionally, Ms Chester revealed that ASIC currently has further stop orders under consideration and several other DDO-related investigations underway.