ASIC calls for improvements to the design and distribution of investment products
In brief
In the second article of our three-part series examining the Australian Securities and Investments Commission's (ASIC) calls on investment product issuers to ‘lift their game’ on design and distribution obligations, we take a closer look at the regulatory guidance on relevant investment products characteristics and the defects and areas for improvement identified by ASIC in Report 762 Design and distribution obligations: Investment products.
In the table below, we have summarised the headline areas for improvement among the issuers of managed investment schemes, which ASIC has identified under the review.
The design and distribution obligations will remain a key focus for ASIC and the following list should help to inform issuers of managed investment schemes of the potential areas of defect that might be considered on a product compliance review or in relation to disclosures in the Target Market Determination.
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Investment product Characteristic |
Defect and area for improvement |
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Portfolio |
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Investment term |
Lack of clarity in disclosing the exact investment term of an investment product, where the product is close-ended |
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Investment strategy risks |
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Product risk |
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Product performance |
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|
Withdrawal / redemption rights |
Lack of clarity in disclosing withdrawal needs for an investment product such as:
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Limitations on redemptions |
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TMD deficiencies and limitations |
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Distribution strategy or sales process |
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Target consumer class |
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The defects and areas for improvement identified by ASIC highlight the importance and the obligation of both issuers and distributors to develop and maintain effective product governance arrangements.
Overall ASIC's review found that there is considerable room for improvement.
Notably:
- target markets that were not clearly defined was a factor in 15 of the 26 stop order actions taken against issuers of investment products in the review period;
- issuers assessed the risks of a scheme consistently and in line with the overall risk attributes of the product. However, ASIC identified various issues with the use of risk profiles as outlined below.
Therefore one salient lesson for issuers is to ensure accurate alignment between the investment product, the target market and risk profiles and to ensure satisfactory arrangements for meeting review obligations, but more importantly for issuers to improve their use of review triggers and the process undertaken to conduct a review.
The final article in our three-part series will take a closer look at the interim stop orders issued by ASIC and discuss if there are commonalities in the regulatory approach.