ASIC rolls out the stop orders on Target Market Determinations

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By Matthew Farnsworth, Partner, Mark Bland, Partner, Geoffrey McCarthy, Special Counsel and Kayla LaManna, Law Graduate

Regulation of financial services in Australia relies heavily on disclosure as a tool for ensuring regulator outcomes are achieved. The Design and Distribution Obligations (DDOs) were in part a response to the failure of disclosure to protect consumers, requiring issuers to have a consumer-centric approach to designing and distributing products. However, it too has a disclosure aspect, Target Market Determinations (TMDs). Enforcing the DDOs is a strategic priority of ASIC and since July 2022 it has issued 11 interim stop orders on TMDs, grinding the distribution of products to a halt, and causing significant reputational damage.

In this article, we look at ASIC’s recent enforcement action on DDO and TMDs. ASIC has announced that it has many targeted surveillances on foot, so now is the time for issuers to review their TMDs and compliance with DDOs.

Target Market Determinations and Design and Distribution Obligations

A TMD is a mandatory written document to be prepared and made publicly available before engaging in ‘retail product distribution conduct’. Being the central facet of the DDO regime, a TMD sets out the class of consumers a financial product is likely to be appropriate for (the target market), settings relevant to the product’s distribution as well as periods and triggers for review of the TMD.

ASIC’s Corporate Plan

In ASIC’s Corporate Plan for 2022-26, the DDOs are one of ASIC’s four priorities ASIC.

As part of ASIC’s core strategic project in relation to the DDO regime, ASIC states that its actions will include:

  1. conducting surveillance of superannuation trustees’ distribution practices in relation to choice superannuation products, and examining the role of financial advisers and their licensees in the distribution of underperforming choice products;
  2. conducting surveillance of a sample of target market determinations in the superannuation and managed funds sectors;
  3. engaging with major supervised institutions on how they are using the design and distribution reforms to improve customer outcomes; and
  4. taking enforcement action to address poor design and distribution of products.

ASIC has stated it will pursue targeted, risk-based surveillances and take enforcement action, including issuing stop orders, and other regulatory action to address poor design and distribution of products. ASIC Deputy Chair, Ms Karen Chester, told the Economics Committee in October 2022 that DDOs have given ASIC “one of the best tools we could ever have asked for.”

Recent enforcement action

In July 2022, ASIC placed interim stop orders on three financial firms in response to deficiencies in the TMD for their products. These were the first DDO interim stop orders ASIC had imposed to prevent an offer of financial products to consumers.

ASIC stated the three financial firms did not appropriately identify the consumers they intended to target or did not have a TMD, which meant the products may have been marketed and sold to retail investors for whom they were not appropriate or too risky.

ASIC made interim stop orders preventing two companies from dealing in shares in relation to retail investors, providing a disclosure document or providing general financial product advice in relation to the shares to retail investors. When the prospectuses were made publicly available during the exposure period, they did not have a TMD and the companies said that applications to invest would be processed on a ‘first come, first served’ basis.

On 29 August 2022, ASIC issued a media release urging superannuation trustees to review and if necessary, improve the effectiveness of TMDs for their products, after a sample review of trustee compliance found some poor practices.

ASIC made several observations which are important for superannuation trustees to consider when reviewing their TMDs, including:

  1. ASIC recommends trustees clearly define the intended target market against the product and its key attributes.
  2. Investment sub-markets should be specific and comparable, using quantifiable investment objectives or identifiable benchmarks and commonly adopted measures, with the minimum timeframe for each investment option expressed in years.
  3. ASIC recommends trustees consider how insights from their Member Outcomes obligations are incorporated into their review triggers.
  4. Regular complaint reporting is designed to allow trustees to stay informed about their products and enable assessment of whether the TMD remains appropriate.

On 13 September 2022, ASIC placed interim stop orders on the offer and distribution of two managed funds, in response to alleged deficiencies in the TMDs. In each case, ASIC stated that no final stop order was made after amendments were made to the TMDs.

Following on from this, ASIC announced it had placed an interim stop order on a responsible entity of a retail income fund on 30 September 2022, preventing the responsible entity from offering or distributing the interests to retail investors, due to a non-compliant TMD. Based on the features and risks of the Fund, ASIC considered the fund was not suited to the target market as defined in the TMD and found breaches of the requirement to specify appropriate trigger points for review. ASIC further considered that it would not be reasonable to conclude that even while meeting the distribution condition, the issue would likely to be consistent with the likely objectives, financial situation and needs of the retail client in the target market because the distribution condition was inadequate. The Fund’s distribution condition relied purely on self-certification by investors that they are in the target market.

In its Media Release, ASIC stated that, “If ASIC’s concerns are not addressed in a timely manner, a final stop order will be placed on the Fund.” Although ASIC later revoked the interim stop order, ASIC has stated the fund decided to cease all fundraising after the interim stop order was granted.  One wonders whether ASIC’s media release is consistent with procedural fairness.

ASIC has also taken action to protect retail investors from harm associated with crypto assets, announcing it had placed interim stop orders on 17 October 2022 preventing a fund manager from offering or distributing three funds because of non-compliant TMDs. The order is valid for 21 days unless revoked earlier.

The Bitcoin, Ethereum, and Filecoin funds (BTC, ETH and FIL) invest in individual crypto assets, meaning investors may experience significant volatility and deep negative returns when asset prices decline. ASIC considers the funds are not suited to the broad target market defined in the TMDs, which includes investors with a medium risk profile and investors intending to use the fund as 75-100% of their portfolio.

ASIC states that crypto assets are highly volatile and complex, making concentrated investments risky and speculative. ASIC’s action against the crypto funds signals an increased regulatory focus on the crypto sector and a desire to protect retail investors. Fund issuers must consider the unique features and risks associated with crypto assets when determining their target markets.

On 21 October 2022, ASIC placed an interim stop order preventing a financial services provider from offering or distributing their Fund to retail investors because of a non-compliant TMD. ASIC considered the Fund’s portfolio of secured and unsecured loans, credit, leases and other fixed-interest financial assets to be high-risk and was concerned the issuer had not appropriately considered the features in determining the target market. ASIC also considered the Fund’s TMD did not meet the appropriateness requirements under the DDOs.


ASIC has targeted surveillances in progress to assess whether or not product issuers and distributors are complying with the DDOs. The stop order power provides an administrative mechanism allowing ASIC to prohibit entities from engaging in specific conduct breaching the DDOs which includes:

  • failing to satisfy the TMD requirements;
  • distributing a financial product when a TMD has not been made for the product or is no longer appropriate; or
  • failing to take reasonable steps that will or are reasonably likely to result in distribution of the product being consistent with the TMD.

The action to date indicates the importance of issuers appropriately considering the risks and features of the product in defining the target market, including ensuring the target market is not defined too broadly. The nature of the underlying investments and the liquidity of the product will be relevant in making this assessment. It is also important to ensure the distribution conditions are adequate and specific enough to ensure the product is directed to the target market.

In light of ASIC’s recent enforcement activities, issuers should revisit their TMDs to ensure they are and remain appropriate. The risks of non-compliance include having to cease distribution of the product, reputational risk and incurring costs in dealing with intervention by the regulator.

Numerous breaches of the DDO regime can constitute criminal offences under section 994B to 994E of the Act punishable by imprisonment.  In addition, civil penalties apply for these provisions, with contravention by a body corporate subject to a maximum penalty of the greatest of 50,000 penalty units, which is currently $11.1 million and more depending on gain or annual turnover of the issuer. Penalties can apply to persons involved in a contravention not just the issuer or distributor.  Also a person who suffers loss or damage due to a contravention can take civil action against the person in breach.

For an AFS licensee, any breach must be reported to ASIC.

TMDs must be referred to in advertising but they are not a form of marketing document and need to be drafted from a different perspective to a PDS, prospectus or investment strategy. While it is important to define the target market in a way that meets the appropriateness test, care is necessary to avoid unnecessarily reducing the scope of the target market and the practical expectations placed on distribution.  The issuer will need to put in place arrangements to prevent distribution outside that market (except for personal advice) so its not enough just to have a complying TMD if it is not workable with the fundraising objectives.

At Mills Oakley we have experience with drafting and reviewing TMDs including for superannuation and managed funds and becoming involved when a stop order is made. Please contact us for further assistance in preparing, reviewing or defending your TMDs.

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