Retail investors still being sold unsuitable high-risk products: ASIC

Companies selling managed funds, shares issued by investment companies, debentures and preference shares, needed to lift their game, ASIC’s Karen Chester says.

Australian Securities and Investments Commission deputy chair Karen Chester. Picture: Kym Smith

Too many companies are still selling inappropriate risky products to people that don’t understand them, the corporate watchdog said, 19 months after the regulator ordered firms to take reasonable steps to avoid harming customers.

The Australian Securities and Investments Commission on Wednesday said companies selling managed funds, shares issued by investment companies, debentures and preference shares, needed to lift their game or risk being stopped.

“Investment product issuers have been on notice to meet the design and distribution obligations since October 2021. It is disappointing to see DDO deficiencies across the board, and by large and small product issuers alike,” ASIC deputy chairwoman Karen Chester said.

ASIC has the power to block firms from offering or distributing financial products if they don’t meet DDO obligations requiring the products are appropriate for customer’s likely objectives, financial situation and needs.

In a review, ASIC found “a significant number of the product issuers” made deficient target market determinations - documents that since October 2021 firms need to produce outlining the type of consumers the product is meant to target.

As a result of the review, the corporate watchdog issued 26 stop orders on investment products from 18 issuers in the past nine months, representing $6.6bn in funds invented by retail investors.

“‘Poor product design or distribution puts retail investors at risk of financial harm, ending up in products that don’t meet their needs,” Ms Chester said.

The regulator said it would continue to take regulatory action where transgressions put consumers at high risk of harm.

The review covered 12 managed fund issuers, 75 funds, and 35 retail offers of investment company shares, preference shares, debentures and Tier 1 securities issued by banks that have occurred since March 2022.

The stop orders where used in cases where ASIC found that the funds were defining markets too broadly, were using unsuitable investor risk profiles, products were being used for too high a proportion of an investor’s portfolio or had unsuitable investment timeframes or withdrawal features.

Last month, ASIC issued interim stop orders across three BT funds worth $4.2bn due to non-compliant market determinations.

In November, the regulator also moved against Perpetual to stop it, for 21 days, from marketing its two funds - Perpetual Pure Microcap fund and the Perpetual Geared Australian Share Fund - because their MTD did not explain the risk to investors.

Others who have been issued with interim stop orders include MPG Funds Management and Fawkner Property Limited.

The regulator will turn its attention in coming months to how product issuers interact with distributors to “ensure they are not straying beyond their target market” and to how they monitor their products “to ensure retail investors are receiving suitable products on an ongoing basis” she said.

“We won’t hesitate to take further action, from stop orders through to court proceedings, especially where we see egregious failures. We have further stop orders under consideration and several other DDO-related investigations underway.”

In December, ASIC launched court proceedings against American Express for knowing its David Jones-branded credit cards were being confused for loyalty cards for months, accusing it of failing to meet the target market determination requirement.