ASIC commences first DDO civil penalty enforcement action against product distributor

23 December 2022

ASIC has commenced civil penalty action against Firstmac Limited (Firstmac) in respect of alleged breaches of Design and Distribution Obligations (DDO) distributing a financial product called High Livez. This is the first civil penalty action taken against a product distributor in relation to alleged DDO breaches, and follows the DDO civil penalty action against AMEX, a product issuer.

Perpetual Trust Services Limited (Perpetual) is the issuer of redeemable units of High Livez. On 29 November 2021, Perpetual made a Target Market Determination (TMD) for High Livez, which relevantly states the following:

• The target market of High Livez comprise of consumers who sought regular income as part of an investment portfolio where the consumers had a three to five year timeframe and a low risk/return profile.
• A consumer is unlikely to be in the target market of High Livez if, amongst other things, the consumer i) sought a guarantee or protection against capital loss whilst still seeking the potential for capital growth (Capital Guaranteed Objective); or had a short investment timeframe and may wish to redeem within two years (Short Investment Timeframe).

Under the DDO regime, Firstmac is required to take reasonable steps that would have, or would have been reasonably likely to have, resulted in distribution of the High Livez product being consistent with the above TMD. 

ASIC alleges that Firstmac was cross-selling High Livez to its existing customers (Firstmac Term Deposit Holder) who invested in Firstmac’s term deposit product (Firstmac Term Deposit). ASIC argues Firstmac Term Deposits Holders may be consumers who had a Capital Guaranteed Objective and Short Investment Timeframe, because the Firstmac Term Deposit:

• Was guaranteed by the Commonwealth Government in the amount of up to $250,000 per Firstmac Term Deposit Holder;
• Did not fluctuate in value, and the Firstmac Term Deposit Holder received the full amount of the capital invested at maturity plus any return; and
• The maturity terms for Firstmac Term Deposit ranged from 30 days to two years.

ASIC alleges that Firstmac did not take reasonable steps to ensure that Firstmac Term Deposit Holders they were cross-selling High Livez to, did not have a Capital Guaranteed Objective or a Short Investment Timeframe. In other words, Firstmac indiscriminately targeted Firstmac Term Deposit Holders to invest in High Livez without considering the TMD for that product, and that alone is a breach of the DDO regime.

This enforcement action is notable because:

• It is the first substantive enforcement action of any kind in relation to a breach of a distribution obligation under the DDO regime. Previous enforcement actions of the DDO concerned the breach of issuer obligations, such as alleged defects in preparing the TMD and failure to review TMD when required.
• It is only the second civil action that ASIC commenced under the DDO regime. The first was commenced against American Express just two weeks ago on 5 December 2022, which we covered in our article here.

This case serves as a warning to distributors of financial products, that they should seriously read and consider the TMDs of all the products they distribute, and be proactive in making the necessary safeguards to ensure distribution of those products in accordance with the TMDs. 

Dan Mackay, Director, and Wilfred Cheng, Lawyer

Mackay Chapman

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.

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