The Australian Securities and Investments Commission (ASIC) announced on Friday that the Federal Court found Firstmac breached section 994E(3) of the Corporations Act in the regulator’s first civil penalty action for design and distribution obligations (DDO) violations.
According to court documents, Firstmac failed to take reasonable steps to ensure its High Livez investment product was distributed to term deposit holders in line with its target market determination (TMD).
Introduced in October 2021, DDOs require firms to design financial products aligned with consumer needs and include a mandatory target market determination (TMD) outlining the product’s suitable consumer class and distribution criteria.
“This is an important decision that acknowledges the risk of consumer harm caused by poor product design, distribution and marketing by Firstmac,” ASIC’s Joe Longo said on Friday.
The regulator’s chair clarified that ASIC pursued this matter following concerns “customers were exposed to the risk they might obtain financial products that were not appropriately suited to them”.
“Today’s judgment 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,” Longo said.
In July 2024, the court found Firstmac implemented a “cross-selling strategy” of marketing investments in High Livez – a registered managed investment scheme – to 780 consumers who held existing term deposits with Firstmac.
In doing so, the lender was found to have breached its DDO when it sent product disclosure statements (PDS) for the Firstmac High Livez to those existing term deposit holders from October 2021 to September 2022, without first taking reasonable steps to ensure consistency with its TMD for the product.
On Friday, in handing down her penalty, Justice Downes ruled that Firstmac “courted the risk” of distributing the High Livez PDS to individuals outside its target market and deemed its actions “objectively reckless”.
“Firstmac’s conduct fell short of the standard required by the DDO and increased the risk of harm to consumers to whom the High Livez PDS was inappropriately distributed,” Justice Downes said.
Court documents revealed that Firstmac acknowledged the need for a penalty and suggested $4 million, significantly less than ASIC’s proposed $25 million. On Friday, the judge set the penalty at $8 million, deeming ASIC’s $25 million request “excessive”, given the untested nature of the legislation.
InvestorDaily was cited in the court documents as part of the “important context” section. The judge noted that on 23 March 2022, Firstmac executives, including audit and compliance manager Adria Cunningham and chief financial officer James Austin, discussed an InvestorDaily news alert titled, ASIC concerned consumers being misled by marketing of managed funds.
The article highlighted ASIC’s public statement about its surveillance of managed fund marketing, focusing on “misleading performance and risk representations” in promotional materials. Cunningham forwarded the article with the comment, “[m]aking a bit more sense,” to which Austin replied, “[y]es, provides very good background.”
During the penalty hearing, Austin is said to have referred to the March 2022 announcement made by ASIC as “a broad fishing expedition” rather than being specifically related to DDO, referencing the article as context.
