Federal Court delivers ASIC a win, finding Firstmac contravened product design, distribution laws

The billionaire Kim Cannon-led Firstmac has become the corporate regulator’s first scalp for non-compliance with design and distribution rules.

Firstmac, run by managing director Kim Cannon, was found to have implemented a controversial cross-selling strategy of to almost 800 retail consumers. Picture: Annette Dew

The Kim Cannon-led Firstmac has become the corporate regulator’s first scalp for non-compliance with design and distribution rules, after the Federal Court found it implemented a controversial cross-selling strategy that contravened the law.

Justice Kylie Downes said the steps non-bank lender Firstmac took were “wholly inadequate” to meet its legal obligations and ensure customers that were marketed a product sat within a relevant target market determination, under governing legislation.

The ruling in favour of the corporate regulator found Firstmac marketed a High Livez investment product to almost 800 retail customers who held less risky term deposits with the firm. By doing so, the company didn’t first take “reasonable steps” to ensure that strategy was consistent with a target market determination.

The judgment touched on the dispatching of High Livez product disclosure documents to retail term deposit customers, who may have had a different appetite for risk.

A target market determination essentially sets out which consumers a financial product is likely to be appropriate for, and also outlines information relating to the product’s distribution and review. A new regulatory regime came into force in late 2021 as part of a push to ensure products were fit for purpose and had consumers in mind when they were being designed, marketed and distributed.

Justice Downes said: “Although it recognised that there was a possibility that some of the TD (term deposit) holders who would be the recipients of the distribution conduct may have held either or both a capital guaranteed objective and a short investment timeframe objective and were therefore outside of the target market for High Livez, the steps which Firstmac took following that recognition fell far short of the standard of behaviour expected of a reasonable person in its position.”

ASIC deputy chair Sarah Court. Picture: NCA NewsWire / Ian Currie

The Australian Securities and Investments Commission is now seeking court orders imposing penalties against Firstmac, with a case management hearing scheduled for July 19. The legal case, which started in late 2022, marks the regulator’s first design and distribution obligation civil penalty action against a financial product distributor.

A Firstmac spokesman said: “Firstmac acknowledges the decision of the Federal Court today and is considering the judgment carefully.”

ASIC’s deputy chair Sarah Court said the regulator pursued the case because it was concerned customers were “exposed to the risk” they might obtain a product that was not appropriately suited to them.

“This (ruling) should act as a deterrent to anyone engaged in cross-selling financial products who fails to consider their design and distribution obligations before sending product disclosure statements,” she added.

Earlier this year, Mr Cannon – Firstmac’s founder and managing director – was valued at $1.06bn by The List, published by The Australian. That is despite Firstmac being hit last year by a cost-of-funding squeeze as a result of sharply rising interest rates.

Firstmac’s term deposits referred to in the court action were issued by BNK Banking Corporation trading as Goldfields Money. Firstmac is a substantial shareholder in ASX-listed BNK.

The Federal Court legal action delved into the fact Firstmac’s term deposits were capital guaranteed by way of the federal government’s up to $250,000 per account guarantee, meaning the products were not volatile or risky in nature. That compared to capital invested in High Livez, which was not capital guaranteed and had a unit price that was subject to volatility.