In a significant ruling, the Federal Court has ordered Firstmac Limited (“Firstmac”) to pay $8 million in penalties for breaching its design and distribution obligations (“DDO”) under the Corporations Act 2001 (Cth).
The Firstmac case was the first civil penalty action made by the Australian Securities and Investments commission (“ASIC”) against a distributor for failing to comply with the requirements prescribed under the DDO regime.
Key Points
- Firstmac distributed its High Livez managed investment scheme to its term deposit holders without taking reasonable steps to ensure it was suitable for their target market. This distribution began within the same month the DDO regime commenced and lasted for 11 months.
- The distribution only resulted in one term deposit holder investing in the scheme and losing $184.71 due to a negative return of 2.87 percent in the scheme. Firstmac also only benefitted by receiving a negligible management fee of $150.
- ASIC found that Firstmac had contravened its DDO obligations and imposed a penalty of $8 million on Firstmac.
- This is the same penalty that was imposed previously on Amex for a similar DDO breach and indicates that where senior management that fails to pay attention and ensure compliance with their DDO requirements, the Court will impose.
Design and Distribution Obligations and Reasonable Steps
The DDO regime commenced on 5 October 2021 and mandates that issuers of financial products take a consumer-centric approach in identifying and defining appropriate target markets for their products.
Distributors, in turn, are required to take ‘reasonable steps’ to ensure that these products are marketed and distributed in a way that aligns with the product’s target market determination (“TMD”).
The DDO regime require issuers and distributors of products to retail consumers to take reasonable steps to ensure that the financial products are marketed and distributed in a manner consistent with their TMD.
Failure to adhere with these requirements can result in significant penalties, as demonstrated by the $8 million fine imposed on Firstmac.
Background of Firstmac
- Firstmac distributes term deposits and other investment products, including interests in its High Livez investment product, an unlisted registered managed investment scheme.
- On 14 December 2022, ASIC commenced civil penalty proceedings in the Federal Court against Firstmac alleging that in marketing and distributing the High Livez investment scheme to term deposit holders, Firstmac failed to take reasonable steps to ensure that the product was distributed in accordance with the TMD.
- ASIC’s investigation revealed that Firstmac engaged in a “cross-selling strategy”, marketing the High Livez investment scheme to 780 customers who held term deposits with the company.
- Unlike Firstmac’s term deposits which were guaranteed by the Commonwealth Government in the amount of up to $250,000 per account, the High Livez investment scheme was not a capital guaranteed product.
- The investment timeframes for the High Livez investment scheme were a minimum of between three and five years as compared to the term deposits which ranged between 30 days and two years.
- The product disclosure statement (PDS) for the High Livez investment scheme was sent to these term deposit holders between October 2021 (the same month the DDO regime commenced) and September 2022 with Firstmac failing to take reasonable steps to ensure that the product was distributed in line with the target market outlined in the TMD for the High Livez investment scheme.
- Only one term deposit holder invested in the High Livez investment scheme and suffered a loss of $184.71 due to a negative return of 2.87 percent in the High Livez investment scheme. Firstmac also only benefitted by receiving a negligible management fee of $150.
Court Findings
The Federal Court ruled in ASIC v Firstmac Limited [2024], that Firstmac had contravened section 994E(3) of the Corporations Act 831 times when it distributed its High Livez investment scheme to term deposit holders without taking reasonable steps to ensure that the product was suitable for their target market, as provided within the product’s TMD.
Justice Downes, in delivering the penalty judgement, found that Firstmac’s conduct was “objectively reckless” and had exposed consumers to unnecessary risks. The Federal Court concluded that Firstmac had “courted the risk” of distributing the High Livez PDS to consumers who fell outside of the product’s designated target market.
In determining the penalty applicable for Firstmac, the Federal Court considered the case of ASIC v Amex [2024] to be a useful comparator in which Amex was found to have contravened s994C(4) of the Corporations Act and a penalty of $8 million was imposed.
In the case of Amex, as in the case of Firstmac, it was found that senior management failed to pay attention to the regulatory requirements under the DDO regime and the checks within the company were insufficient to ensure that these obligations were complied with. Given the many similarities between the circumstances of Amex and the Firstmac case, the Federal Court imposed an $8 million penalty for Firstmac even though the maximum potential penalty for Amex was $146 million as compared to a maximum potential penalty for Firstmac of $9.22 billion.
The Federal Court ruled that even though the cross-selling began in the same month that the DDO regime was introduced and resulted in a loss of only $187.71 to one Firstmac customer, the investment product was moderate risk as opposed to the low-risk term deposits and the $8 million penalty was justified.
This has set a precedent penalty for companies with senior management that fail to pay attention and ensure compliance with their DDO requirements. Companies that fail to adhere to the regime due to these factors, can expect a penalty similar to the $8 million penalty shown within Amex and Firstmac.
Joe Longo, chair of ASIC, commented on the decision in Firstmac by stating that the “judgement should act as a deterrent to anyone engaged in cross-selling financial products who fails to consider their design and distribution obligations before sending product disclosure statements”.
Firstmac’s remediating steps
The Federal Court also noted that it did not impose a higher penalty on Firstmac due its significant steps to comply with DDO following the civil penalty action including:
- Restructuring its operations to separate audit and compliance functions and creating an executive level role of Head of Risk and Compliance who reports directly to the CEO and Risk Committee.
- Engaging external consultants to provide training, including to Firstmac’s board, senior executives and departmental manager.
- Engaged external consultants to assist Firstmac to update its DDO Policy which all Firstmac staff have access.
- Prepared a control monitoring schedule which sets out the frequency of monitoring various activities undertaken for compliance with the DDO.
- Updated the High Livez investment scheme script and website in consultation with external advisors so that visitors were required to answer knock-out questions before they were able to view information above the High Livez investment scheme.
Implications for the Financial Services Industry
The ruling serves as a clear warning to other financial services firms about the consequences of non-compliance with the DDO regime.
A notable aspect of this case is that Firstmac’s breaches began within the same month the DDO regime commenced, highlighting the challenges that financial services firms face in adapting to new and evolving regulatory frameworks. With such a substantial penalty applied for both Amex and Firstmac, the importance of immediate compliance with any changes to financial services law, ASIC guidance and the DDO regime is evident.
Issuers and distributors of retail products must be vigilant in ensuring that their distribution strategies align with the need and characteristics of the target market identified for each product.
The Firstmac case underscores the importance of not only having a TMD and PDS in place but also ensuring that reasonable steps are taken to prevent the misdistribution of financial products to unsuitable customers.
If you would like further information on the effect of these cases on the DDO regime or assistance with ensuring you are compliant with your obligations under the DDO regime, including any recent changes and amendments to the regime, please get in contact with Brendan Ivers at brendan.ivers@kainlawyers.com.au.
