ASIC’s enforcement priorities in design and distribution: What we know from recent stop orders and Federal Court decisions

Receiving a stop order or Federal Court claim relating to a licensee’s product design is extremely stressful for licensees.  We should know! We have helped numerous licensees lift interim stop orders across various sectors.  More broadly, we represent licensees in Federal Court proceedings where ASIC has taken action against the licensee for particular conduct or product design reasons.  (Recently, our firm won against ASIC in a Federal Court case brought by ASIC alleging that the product was a financial product.^[1])

What have ASIC’s recent Court wins told us about ASIC’s enforcement of the design and distribution obligations (DDO) regime?

The message is clear. ASIC’s willingness to take action to enforce compliance with the DDO regime has the support of the Courts.  Just two recent examples include:

• On 10 July 2024, the Federal Court found that Firstmac Limited^[2] failed to take reasonable steps to distribute one of its investment products consistent with its target market. Firstmac marketed investments in its High Livez product to existing customers with term deposits. The Court found that Firstmac did so without first taking reasonable steps to ensure whether those customers were within the target market. ASIC Deputy Chair Sarah Court said ‘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’.
• On 24 July 2024, the Federal Court ordered American Express Australia Limited^[3] to pay $8 million in civil penalties for failures to review its TMDs for co-branded David Jones credit card products. The Court found that AMEX ought reasonably to have known that the cancelled application rate was reasonably suggestive that the TMDs were no longer appropriate. Justice Jackman said, ‘a penalty of this order ensures it has a “sting” sufficient to deter both repetition by American Express and contravention by other providers of financial products, and one that goes beyond being a mere “cost of doing business”’.

Interim stop orders

ASIC also has the administrative power to make stop orders, where it has concerns with DDO compliance.

The administrative power to make stop orders arises when ASIC is satisfied that a TMD has not been made, is deficient or has not been reviewed as required, or that reasonable steps have not been taken to ensure that distribution is consistent with the target market. The purpose of introducing the design and distribution regime and these powers was to protect consumers from harm caused by failures in the design and distribution of financial products that was not being adequately prevented by disclosure requirements. Since October 2021, ASIC has used what has been called its ‘go to regulatory tool’^[4] on at least 80 occasions, with almost half of the stop orders being issued in the last year alone.

The standout activities ASIC has sought to address are TMD deficiencies and failures to take reasonable steps with growing focus on products it considers high risk. With the design and distribution of financial products listed as the number one strategic priority for ASIC in 2024-25, there is no indication that its DDO enforcement actions will slow anytime soon.

TMD deficiencies

ASIC issued its first interim stop orders in June 2022 against three financial service providers in relation to investment products for failing to make or preparing deficient TMDs. ASIC’s initial focus was on investment products, and its broad concerns are outlined in its May 2023 publication on DDOs and investment products^[5]. These concerns include providers’ over-reliance on template TMDs, defining the target market too broadly, unsuitable investor risk profile, investment timeframes and/or withdrawal features, inappropriate levels of portfolio allocation and distribution conditions.^[6]

Reasonable steps

ASIC has maintained its focus on what it considers reasonable steps failures, and its broad concerns are outlined in its September 2023 publication on DDO and OTC derivatives^[7]. These concerns include providers’ over-reliance on client questionnaires to qualify clients and failures to make greater use of available data to assist the distribution arrangements.

ASIC’s specific concerns at the centre of its use of interim stop orders in relation to OTC derivatives has been what it has considered to be inadequacies of onboarding processes, including in relation to onboarding questionnaires and other tools to adequately enquire into clients’ trading objectives and needs, financial situation, knowledge and risk tolerance. ASIC also continues to express its concerns over significant design flaws in questionnaires, such as prompts for clients to review incorrect answers and the ability to re-attempt failed questionnaires within short periods.

More than the ’cost’ of doing business

Stop orders are a blunt instrument. While they sometimes follow a sustained engagement with ASIC including information requests, at other times they can come as a surprise.  However they come, there are opportunities to prevent your business being subjected to a ‘stop work’ order.  The economic impact cannot be underestimated, when considering:

• at least 21 days of stop-work;
• the resources required to design and implement new compliance processes;
• consumer remediation;
• the involvement of the licensee’s third-party service providers (such as IT); and
• the overarching sense of urgency.

ASIC’s use of stop orders and recent Court actions illustrate that deterrence is in the forefront of its enforcement activity, and there is no sign that it is slowing down.

While our firm has a preventative law focus, which encourages clients to embed practices that will avoid the costly imposition of stop orders on their business, we have also successfully assisted clients to navigate their way through the issue of stop orders and their ongoing compliance with their DDO obligations.

Authors: Ursula Noye (Senior Associate) and Michael Mavromatis (Partner)

If you’re new to DDO or looking to revise your existing arrangements, get in touch with our expert team or take a look at our specially tailored DDO document templates

[1] This decision didn’t relate to DDO compliance, but did relate to product design.  It is on appeal by ASIC, at the time of writing. Australian Securities and Investments Commission v Finder Wallet Pty Ltd [2024] FCA 228

[2] Australian Securities and Investments Commission v Firstmac Limited [2024] FCA 737

[3] Australian Securities and Investments Commission v American Express Australia Limited [2024] FCA 784

[4] 23-115MR ASIC calls on investment product issuers to ‘lift their game’ on design and distribution obligations | ASIC (viewed 7 August 2024)

[5] ASIC, REP 762 Design and distribution obligations: Investment products, 3 May 2023

[6] See article by Josh Wigney of Holley Nethercote, ‘Currently trending: Interim stop orders – ASIC’s focus on design and distribution’, 7 July 2023

[7] ASIC, REP 770 Design and distribution obligations: Retail OTC derivatives, 6 September 2023