The DDO is here. An expensive lesson in compliance with ASIC’s recently introduced disclosure requirements for financial products for retail clients

Introduction

In a landmark decision, the Australian Securities and Investments Commission (ASIC) successfully obtained the first pecuniary penalty orders ($8 million) for contraventions of the design and distribution obligations (DDO) under the Corporations Act 2001 (Cth) in its action against Firstmac Limited (Firstmac).

This article looks at the implications of this decision, examining its impact on financial product distribution and compliance requirements for corporations operating in Australia’s financial services sector.

Background and Context

In a liability judgment handed down on 10 July 2024, the Court found that Firstmac Limited, a non-bank lender contravened section 994E(3) of the Corporations Act by failing to take reasonable steps to ensure that the distribution of its financial product, High Livez, was consistent with its target market determination (TMD).

Under the DDO regime which commenced on 5 October 2021, issuers of financial products are required to make a TMD before offering a financial product to retail clients. The TMD must describe the class of retail clients that comprises the target market for the product. The TMD must be such that it would be reasonable to conclude that if the product is issued or sold to a retail client in the target market, it would likely be consistent with the client's objectives, financial situation, and needs.

The Court found that Firstmac breached section 449E(3) in circumstances where it implemented a “cross-selling strategy” of marketing its High Livez product to 780 existing clients who held term deposits with Firstmac, without first taking steps to ensure the TMD for High Livez was consistent with the target market of its existing term deposit customers.

Penalty calculation

At the penalty hearing, ASIC sought a penalty against Firstmac of $25 million. While Firstmac accepted a penalty was warranted, it contended that the penalty should be in the range of $3 million to $6 million, and that the amount of $4 to $4.5 million was appropriate. For the reasons to follow, the Court found that $8 million was an appropriate penalty in this instance.

The Court emphasised that a substantial penalty was required to achieve the public policy objectives of general and specific deterrence. In relation to the former, the Court observed that ‘the penalty in this case will provide guidance to market participants as to the likely implications of contravening the [DDO regime]’.

The Court considered the following factors in reaching the $8 million penalty:

1. The nature and extent of the contraventions
2. The loss or damage suffered as a result of the contraventions
3. The circumstances in which the contraventions took place
4. The involvement of senior management
5. Whether Firstmac ‘courted the risk’ as to whether its conduct would contravene the DDO
6. Whether Firstmac had a corporate culture conducive to compliance
7. Whether Firstmac displayed any contrition

The Court noted that the theoretical maximum penalty which could be ordered against Firstmac was $9.22 billion. The Court observed that this amount was ‘so disproportionately large that it is of little practical value, and senior counsel for ASIC accepted that that amount is not a yardstick’.

Practical Implications

For businesses, this decision serves as a stark reminder of the importance of engaging in proactive risk management and implementing effective compliance systems particularly when developing products that may be regulated by Australia’s complex financial services laws. Companies should ensure that:

1. their distribution practices for financial products align with the DDO;
2. their TMD’s are reviewed proactively when decisions are made to offer financial products to different markets;
3. they have robust compliance measures in place; and
4. their key decision makers are trained to properly understand their DDO requirements.