TMD available
In the rapid fire disclaimers at the end of audio ads for insurance products, you will now hear the words “TMD available”. This statement, probably meaningless to most of the audience, refers of course to the target market determination (“TMD”) for the product.
The TMD is part of the product design and distribution obligations (“DDO”) which came into effect in October 2021. The big idea behind DDO is that inappropriate financial products were being sold to people, so there had to be legislation requiring product providers to identify their target market in a TMD and product distributors to sell to that target market.
Although the TMD is not meant to be a customer facing document, for some reason the legislation included a provision that an advertisement for a product which has a product disclosure statement (“PDS”) must specify where the TMD is available, or otherwise the advertisement must actually describe the target market. For non-PDS products, this rule was not imposed, and so the “TMD available” line is not needed for loan ads.
It’s important that the disclaimer says where the TMD is available, not just that there is a TMD available.
TMDs have to be publicly available at no charge, and the usual practice is to publish them on the provider’s website. It would be interesting to see how many clicks those webpages receive, other than from compliance teams and regulators.
Transition period is over
Before DDO commenced, ASIC acknowledged that there would be a period of transition as industry finalised implementation of additional compliance measures, and ASIC said that it would take a reasonable approach in the early stages of these reforms provided industry participants are using their best efforts to comply.
That early stage of the regulator going easy has ended.
“ASIC’s focus has now shifted to compliance”, said ASIC Deputy Chair Karen Chester in a media release on 28 July 2022. Ms Chester said that “Industry has had sufficient time to bed down its implementation of the DDO regime. We have targeted surveillances underway to check whether product issuers and distributors are complying with their design and distribution obligations. We will continue to look at defective TMDs, as well as issuers who have not made TMDs or not made them publicly available. We will review how product issuers interact with their distributors to confirm they are not straying beyond their target market. We will also review how they monitor and review consumer outcomes to ensure consumers are receiving products that are consistent with their likely objectives, financial situation and needs.”
ASIC issues stop orders
To demonstrate its new focus, ASIC has placed interim stop orders on three financial firms because of TMD deficiencies. The companies subject to the orders are Responsible Entity Services Limited (“RES”) and two companies in the UGC Global Group, UGC Global Alpha Limited and UGC Global Alpha Fund Limited. The actions were announced in the same ASIC media release on 28 July.
RES was promoting units in an investment fund. The underlying asset for the class of units in the fund is a loan to a company that is raising funds to operate a sandstone mine. ASIC was concerned that the target market for the product as described in the TMD included retail investors intending to use an investment in the units as a core component of their investment strategy, and retail investors with an objective of high capital growth or a mixture of capital growth and income. ASIC considered that the product is not appropriate for those types of investors because it is a high risk, illiquid, unlisted, single asset investment, where the return of an investor’s funds and any interest payable under the loan is wholly dependent on the borrower’s ability to repay.
The issue with the UGC companies was that they had made prospectuses available without a TMD for them. The prospectuses were seeking to raise $100 million for each company through the offer of ordinary shares for the purpose of investing in a wholesale fund.
The stop orders made by ASIC against the three companies were only interim stop orders which last for 21 days. Before making a permanent stop order, ASIC has to hold a hearing and take submissions on whether it should be made, but if the delay from that process would be prejudicial to the public interest, an interim 21 day order can be made without consultation.
To make a stop order, ASIC must be satisfied that there has been a breach of the relevant DDO obligations.
The breach for the stop orders made against the UGC companies seems straightforward: the companies did not have TMDs available.
The stop order against RES is more interesting, because it is about the appropriateness of the product being sold. The DDO provisions require that the TMD must be such that it would be reasonable to conclude that, if the product were to be issued, or sold to a to a retail client in the target market, it would likely be consistent with the likely objectives, financial situation and needs of the retail client (Corporations Act s 994B(8)(b)). In simple terms, the product must be appropriate for the target market, and ASIC gets to decide what is appropriate. It is important though that this test of appropriateness is applied to the target market generally rather than individual consumers, and there is no requirement to take into account the personal circumstances of any particular person, or to provide personal advice.
Review of TMDs
A TMD must be regularly reviewed and the review periods – for the initial review and subsequent review – have to be set out in the TMD. It is now almost a year since TMDs have been required, and so for many providers it may be TMD review time. This is an opportunity to look at sales against the target market and to calibrate TMDs.
Patrick Dwyer
Legal Director