DDO regime – key lessons for unlisted property funds from recent ASIC enforcement activity
Unlisted property fund managers should heed ASIC’s two recent wins in enforcing DDO, and take the opportunity to review their compliance with the regime, according to Charlie Renney, Senior Associate at Hall & Wilcox Lawyers.
Mr Renney said ASIC will continue actively enforcing breaches of the Design and Distribution Obligations (DDO), and said two recent court wins for ASIC provides an opportunity for fund managers to address key issues.
Mr Renney delivered a presentation on the DDO at a PFA Master Class event in Melbourne earlier this year, which included discussion on ASIC’s two successful cases involving Firstmac and American Express.
“DDO is still an unfolding regime that's going to impact how retail product issuers distribute and promote their products. Therefore a case analysis of Firstmac and American Express can provide some great lessons for industry.
“A lot of what led to the decisions in these two cases can ultimately be attributed to a lack of training, processes, procedures and supervision, particularly for client facing staff.”
Lessons from Firstmac
Mr Renney said there were some important lessons from ASIC’s case involving Firstmac, a distributor of financial products, and its cross-selling strategy of term deposits to its High Livez investment product.
The Federal Court found that Firstmac failed to take reasonable steps to ensure the distribution of High Livez product was consistent with its TMD. “The court found Firstmac breached the DDO by providing the High Livez PDS to term deposit investors without taking adequate steps.
“The court emphasized reasonable steps must be taken before providing a PDS, not just at the time of issuing the financial product.”
Mr Renney said robust procedures, staff training, and supervision can help ensure compliance with distribution conditions. “The case highlights the need for adequate assistance, policies, practices, and procedures to identify and address distribution conduct inconsistent with the TMD.
“Each case should be assessed on its merits, and reasonable steps should be determined objectively.
“On the issue of what constitutes reasonable steps, the court said it is not an obligation to take all possible reasonable steps, and it is not an obligation to consider all steps available and choose one that is the most correct path.
“ASIC emphasized that whether the requirement to take reasonable steps has been met is to be determined objectively by reference to the standard of behaviour expected of a reasonable person in a distributor’s position.”
Lessons from American Express
The Federal Court ordered American Express to pay $8 million in penalties for breaching the DDO in relation to two co-branded credit cards which were primarily distributed to David Jones store customers.
“These David Jones-branded credit cards had high cancelation rates, and Court found that American Express failed to review the appropriateness of its TMDs and continued to distribute the cards.”
Mr Renney said merely sending a team to address high cancelation rates is not enough; a review of the TMD is necessary. “Review triggers should be quantified, and staff should receive training to identify potential issues.
“The case underscores the importance of having robust procedures and supervision to ensure compliance with DDO.”
Important steps for staying on the right side of DDO
Assess your organization’s procedures, training, and supervision to ensure compliance with the DDO regime – you need to consider what has been done on a daily basis in practice to ensure compliance is monitored.
Consider implementing measures such as requiring acknowledgment of product features, or asking screening questions before providing access to product disclosure documents.
Review the appropriateness of your TMDs and distribution practices if you experience issues like high product cancellation rates.
Ensure you are compliant regarding the ‘reasonable steps’ for product distribution, and review recent ASIC guidance on this issue.
PFA members benefit from access to networking and educational opportunities, industry research, and greater connection with the unlisted property funds industry.
Please contact pfa@propertyfunds.org.au with any questions.