ASIC has placed an interim stop order on offers from APS Savings Limited (APS Savings) in response to deficiencies in the issuers’ target market determination (TMD).
The order stopped APS Savings from issuing interests in, giving a prospectus for, or providing financial advice to retail clients under the existing TMD. The order is valid for 21 days unless revoked earlier.
ASIC made the interim stop order to protect retail investors from potentially investing in offers that may not be suitable for their financial objectives, situation or needs. To date, ASIC has issued 18 interim stop orders under the design and distribution obligations (DDO), including the order on APS Savings.
APS Savings is an unlisted public company seeking to raise funds through the issue of secured notes (APS Notes) under a prospectus. APS Savings proposes to lend the funds raised to its parent company APS Benefits Group Limited, which will use these monies to fund personal loans for its members.
Amongst other concerns, ASIC considered that the TMD for APS Savings did not adequately describe the objectives, financial situation and needs of consumers likely to be in the target market in an objective manner.
ASIC also found that the TMD for the prospectus did not meet the appropriateness requirements under DDO. The distribution conditions in the TMD were limited to identifying investors who had completed investment application forms and were willing to make a minimum investment of $10. There were no additional processes to identify investors as being within the target market. These distribution conditions are unlikely to result in the product being distributed to consumers in a suitable target market.
Further, ASIC considered that the TMD’s initial and subsequent review periods were not reasonable. This meant that if the TMD was no longer appropriate, retail clients may be exposed to significant detriment.
ASIC expects APS Savings to consider the concerns raised regarding the TMD and take immediate steps to ensure compliance. ASIC will consider making a final order if its concerns are not addressed in a timely manner. APS Savings will have an opportunity to make submissions before a decision is made about a final stop order.
ASIC reminds financial product issuers that under DDO, they must define target markets for their products appropriately, having regard to the risks and features of their products. Issuers also need to consider how their product will reach the target market and have appropriate distribution conditions in place to ensure the product is directed towards the target market.
DDO requires firms to design financial products that meet the needs of consumers, and to distribute those products in a more targeted manner. A TMD is an important requirement under DDO. It 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.
ASIC has targeted surveillances underway to check whether product issuers and distributors are complying with DDO. Where firms are not doing the right thing, ASIC can take quick action under DDO to disrupt poor conduct and prevent potential consumer harm.
ASIC issued its first DDO stop orders to prevent the offer of financial products to consumers in July 2022 (22-194MR). ASIC also placed interim stop orders on the Australian Residential Property Fund, the Private Property Trust No. 20 (22-252MR), the APIL Essential Retail Income Fund (22-266MR), three funds operated by Holon Investments (22-278MR), the Westlawn Income Fund (22-284MR), two funds from MPG Funds Management Limited (22-323MR), two Perpetual Investment Management Limited funds (22-326MR), Neldner Road Vintners (22-308MR) and Finnia Income Limited (22-309MR) in response to deficiencies in their TMDs.
Of the 18 DDO interim stop orders issued by ASIC to date, nine remain in place. Nine interim stop orders have been lifted following actions taken by the entities to address ASIC’s concerns or where the products were withdrawn.
Following the interim stop order, APS Savings made amendments to its TMD that addressed ASIC’s concerns. APS Savings added information to its TMD to more accurately define the class of consumers, which comprise the target market for the APS Notes, including their likely investment objective, timeframe, risk profile, ability to bear losses and withdraw their investment. APS Savings also reduced the initial and subsequent review periods and amended the distribution conditions to include a series of knockout questions that help filter out consumers who are not likely to be in the target market. ASIC revoked the stop order on 16 December 2022 after these changes were made.