ASIC successful in first design and distribution obligations case.

News Desk

"From a small family business to one of the largest non-bank lenders in Australia" says the 40 years old company from Brisbane." But on application by The Australian Securities and Investment Commission, the Australian Federal Court has found a fault in its policies and procedures. It raises the fundamental question : how certain should compliance obligations be?

This is what ASIC's media statement today says: "The Federal Court today found that Firstmac Limited breached the new design and distribution provisions by failing to take reasonable steps that would have resulted in, or would have been reasonably likely to have resulted in, the distribution of one of its investment products being consistent with its target market determination (TMD) for the product. This is the first finding by a court of a contravention of these provisions."

The specific criticism was that Firstmac contacted 780 customers and introduced them to a new product. Such cross-selling is a bog-standard techique of almost all companies in almost all sectors. But Firstmac's approach was indiscriminate.

Think of the McDonald's order taker who asks everyone "you want fries with that" without first assessing the customer's suitability for chips In Australia's language, it's called "target marketing determination."

Firstmac sent "product disclosure statements" (in the real world we'd call these brochures or if, we want to be really pompous, prospectus.

The failure to, in effect, pre-qualify potential customers is regarded as a breach of Firstmac's "design and distribution obligations". ASIC says " A target market determination is a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (target market) and matters relevant to the product’s distribution and review."

So, why is this case important?

First, from a financial services compliance perspective it's front-loading research for e.g. direct mail. It's turning KYC, as defined in its original contect under the UK's FInancial Services Act 1986. Under that Act, the obligation to ensure that customers were not sold innapropriate products arose at the point of sale and was specific to the individual. Actually it was much wider than the sale of inappropriate products - it related to "best advice" on investment matters.

Secondly, the specific question raised by this judgment as reported by ASIC is that Firstmac "failed to take reasonable steps". That is an imprecise term and in regulatory matters that is arguably unsatisfactory because it means that decisions taken in good faith are second guessed and re-interpreted by a regulator and then a court.

ASIC said more "The Court found the steps which Firstmac took were wholly inadequate to meet the statutory obligation imposed by the DDO legislation. Her Honour said, ‘it is self-evident that [there] were suitable and available ways to eliminate or minimise the likelihood that the High Livez PDS would be sent to a person who fell outside the target market for High Livez.’ "

In this case, Firstmac appears to have done nothing new - it simply continued business as usual - and as had been usual for its 40 year history.

ASIC's Deputy Chairman Sarah Court made it clear that the policy does, indeed, flip KYC in the 1986 context when she said "‘ASIC took this case because we were concerned that customers were exposed to the risk they might obtain a financial product that was not appropriate to their needs and objectives."
So rather than to protect those who buy, at the point of sale, the Australian regime, begun in 2021, relates to who the provider markets to.

That raises the question whether widespread marketing of financial products is dead.

ASIC is now seeking pecuniary penalties and further hearings will take place.

The full statement is here:…

The judgment is here:…