ASIC has placed interim stop orders on the offer and distribution of two managed funds directly to retail investors in response to deficiencies in the funds' target market determinations (TMD). The funds are:
- the Australian Residential Property Fund;
- the Private Property Trust No. 20.
The orders stop the responsible entities of the funds from issuing interests in, giving a product disclosure statement for or providing general advice to retail clients recommending investment in the funds under the existing TMDs.
ASIC is focussed on reducing the risk of harm to consumers of financial and credit products caused by poor product design, distribution and marketing, especially by driving compliance with design and distribution obligations (DDOs), which commenced on 5 October 2021. A TMD is an important requirement for all financial products under the DDOs.
ASIC has targeted surveillances underway, including in the managed funds sector, to check whether product issuers and distributors are complying with the DDOs. Where firms are not doing the right thing, ASIC can now take quick action to disrupt poor conduct and prevent potential consumer harm.
In this matter, ASIC made the interim stop orders to protect retail investors from potentially investing in a fund that may not be suitable for their financial objectives, situation or needs. ASIC expects the responsible entities involved to consider the concerns raised about the TMDs for their funds and take immediate steps to ensure compliance.
If ASIC's concerns are not addressed, final stop orders will be placed on the funds. The responsible entities involved will have an opportunity to make submissions to ASIC before any final stop orders are made.
ASIC reminds financial product issuers that under the DDOs, 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 its target market.
Australian Residential Property Fund
ASIC has placed an interim stop order on Open Corp Funds Management Limited, trading as ResiFund (Resi), in its capacity as responsible entity of the Australian Residential Property Fund (ARP Fund). The ARP Fund comprises the Australian Residential Property Active Fund and the Australian Residential Property Passive Fund, which are stapled together.
The order is valid for 21 days unless revoked earlier.
The ARP Fund solely invests in a portfolio of Australian residential property assets, borrows money to support its investment activities, engages in property development activities and is relatively low in liquidity.
Given these features, ASIC considered that the ARP Fund is not suited to the objectives, financial situation and needs of all the retail clients in the target market as defined by Resi. The target market in the TMD for the ARP Fund includes investors:
- with a capital preservation investment objective;
- intending to use the product as a core component (25-75%) or potentially as a solution/standalone component (75-100%) of their investment portfolio;
- with a medium or potentially low risk and return profile;
- with a need to withdraw their money from the Fund on an annual basis.
ASIC also considered that the TMD did not meet the appropriateness requirements under the DDOs because the distribution conditions in the TMD were inadequate. Appropriate distribution conditions ensure the product is distributed to consumers in the target market.
ASIC may consider taking further regulatory action against Resi and the ARP Fund.
Private Property Trust No. 20
ASIC has placed an interim stop order on Fawkner Property Ltd (Fawkner) in its capacity as responsible entity of Private Property Trust No. 20 (marketed as Essential Services Trust No. 20) (the Trust).
The order is valid for 21 days unless revoked earlier.
The Trust invests in a concentrated portfolio of commercial property assets and borrows money to support its investment activities. Investors in the Trust cannot withdraw their money from the Trust in the first seven years of their investment.
Given these features and risks, ASIC considered that the Trust is not suited to the objectives, financial situation and needs of all the retail clients identified in the target market by Fawkner. The target market in the TMD for the Trust includes investors:
- with a capital preservation or potentially a capital guaranteed investment objective;
- intending to use the product as a core component (25-75%) or potentially as a solution/standalone component (75-100%) of their investment portfolio;
- with a low risk and return profile;
- with a medium and potentially short investment timeframe;
- with a need to withdraw their money from the Trust annually or longer (which includes those needing to withdraw in less than seven years).
ASIC found that the TMD did not meet the requirements under the DDOs because it did not adequately describe the class of retail clients in the intended market or specify mandatory review periods.
ASIC also found that the TMD did not meet the appropriateness requirements under the DDOs because it did not specify any distribution conditions. Appropriate distribution conditions ensure the product is distributed to consumers in the target market.
ASIC may consider further regulatory action in relation to the Trust and Fawkner.
The interim stop order against Fawkner is a result of ASIC's ongoing surveillance to identify the use of misleading performance and risk representations in marketing by managed funds (22-061MR and 22-249MR). As part of this surveillance, ASIC made a stop order in respect of the product disclosure statement of the Fund (22-199MR).
Background
The DDOs require firms to design financial products that meet the needs of consumers, and to distribute those products in a more targeted manner.
A TMD is a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (the target market), and sets out matters relevant to the product's distribution and review.
ASIC's Regulatory Guide 274 Product Design and Distribution Obligations (RG 274) assists issuers and distributors of financial products that must comply with these obligations under the Corporations Act 2001. Promoters of managed funds should ensure they are familiar with the principles and guidance set out in RG 274.
ASIC recently issued its first interim stop orders under the DDOs to prevent the offer of financial products to consumers (22-194MR).
