The Australian Securities and Investments Commission’s (ASIC) guidance on the design and distribution obligations (DDO) has attracted some “mixed feelings” from a senior regulatory counsel specialising in superannuation, life insurance, and financial services law.
The DDO regime, which came into force in October 2021, 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.
Michael Mathieson, from law firm Allens, specially called out the regulator’s expectations on target market determinations (TMDs) under the DDO regime during a panel session at the Stockbrokers and Investment Advisers Association (SIAA) 2023 conference on Tuesday.
“In my view, the expectations in that guidance go well beyond the legal requirements,” he said.
Mr Mathieson noted that ASIC has been “very active” in issuing stop orders on TMDs. As of mid-May, 36 interim stop orders had been issued, of which 31 were lifted following actions taken by entities to address ASIC’s concerns, or where products were withdrawn.
“My view is that a lot of that action has been based on non-compliance with the guidance, as opposed to non-compliance with the law,” Mr Mathieson stated.
Asked by SIAA chief executive officer and panel moderator Judith Fox about whether there is a tension between ASIC’s role of both interpreting the law and enforcing it that can lead to regulatory overreach, Mr Mathieson suggested that this appeared to be the case.
“On one hand, I feel a bit for ASIC, because industry says to ASIC, ‘give us guidance, give us guidance,’ and then gets some guidance and it’s like, ‘well we don’t like those bits’,” he said.
“On the other hand, I do think that there are instances of that phenomenon that you described, Judith.”
However, Mr Mathieson asserted that ASIC’s action was “not the end of the world”.
“If you’re an issuer, you cop a press release and the indignity of having ASIC rewrite your TMD, but it’s not the biggest penalty,” he said.
“I think the phenomenon exists but I’m not sure that it’s as big an evil as some might think.”
Maria Lykouras, an executive at JBWere, acknowledged that ASIC’s regulatory guides were “very important” and “really helpful” in providing the regulator’s view.
“But sometimes organisations don’t necessarily agree with that interpretation,” she said.
“We, in all our rights, go get our legal advice. We’ll go to somebody like Michael and say, ‘What does that mean? And in our situation and the circumstances that we’re under, we think we should interpret it and apply it this way, what’s your legal view on that?’
“Depending on the legal advice, you may go in a different direction than what the interpretation is, if you believe that’s appropriate as an organisation.”
Ms Lykouras pointed out that there have been court cases in which ASIC was supported in the position that it has taken, but also cases where the regulator wasn’t.
“I think it’s important that we do continue to have regulatory guides that support us. But as organisations, we also have to look at the legislation and take some of our own positions on what we think is right for us,” she added.
Calissa Aldridge, senior executive leader of market supervision at ASIC, said that the objective of the regulatory guides was to share the regulator’s interpretation of the law and be as transparent as possible about when and how it might use its powers.
“We’ve got a principles-based regime, generally speaking … and sometimes the industry needs some guidance to think about how we might apply certain aspects of efficient, honest, and fair in the context of something very complex,” she said.
An initial review found that a significant number of investment 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,” ASIC deputy chair Karen Chester said at the time.
