ASIC Targets Fund Issuer Over Failures to Comply with Design and Distribution Obligations

ASIC has commenced enforcement action against a responsible entity for failing to comply with its obligations under the design and distribution obligations (DDO) regime in Part 7.8A of the Corporations Act 2001 (Cth). The case centres on the issuer’s retail product distribution conduct in relation to a contributory mortgage fund offered to retail clients.

Under the DDO regime, product issuers must prepare a Target Market Determination (TMD) that identifies the class of retail clients for whom a financial product is likely to be appropriate. Critically, issuers are required to take reasonable steps to ensure that any distribution of the product is consistent with that determination (s 994E(3)).

ASIC alleges that the responsible entity:

•        Failed to collect or review responses to investor questionnaires intended to assess whether prospective investors were within the product’s target market.

•        Issued interests in the fund to retail clients without verifying their alignment with the target market as defined in the fund’s TMDs.

•        Accepted applications from investors whose questionnaire responses indicated they were outside the stated target market.

These alleged failings occurred despite the existence of formal application processes—both online and paper-based—which purported to screen for target market suitability. ASIC contends that the issuer’s systems and oversight were inadequate to discharge its obligation to take reasonable steps to align distribution with its TMD.

The consequences for investors included allocations to syndicated mortgage loans that subsequently ceased distributions or returned impaired capital. ASIC alleges that several investors—some of whom may have been outside the target market—suffered actual losses, with one sub-fund recording a 34.7% capital impairment.

Key Lessons for Issuers

This action highlights the expectations placed on issuers under the DDO framework:

•        Documentation is not enough: The mere existence of TMDs and associated forms or processes does not satisfy s 994E(3). There must be active and effective steps to assess retail clients against the TMD criteria.

•        Non-advised distribution heightens risk: Where retail clients acquire products without personal advice, the onus on the issuer to filter appropriately increases. Reasonable steps must include meaningful vetting of investor data.

•        Monitoring and governance: Issuers should have compliance systems that regularly test whether retail clients are being issued products in accordance with the TMD. Passive or post-facto monitoring is unlikely to meet the reasonable steps threshold.

This matter serves as a timely reminder that issuers of financial products must treat DDO obligations as ongoing, operational responsibilities—not mere documentation exercises—and ensure systems are in place to identify, prevent, and rectify distribution conduct that is inconsistent with their TMDs. All responsible entities and product issuers should regularly review their investor onboarding processes, internal controls, and compliance frameworks to ensure that systems designed to assess investor suitability are operating effectively in practice. If you require assistance with maintaining compliance or assessing the adequacy of your internal processes, please contact Chris Mee at cmee@cnmlegal.com.au or call 07 3211 4010.