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. 

Investment product Characteristic

Defect and area for improvement


  • overstating levels of diversification

  • very broad ranges of portfolio allocation

  • assuming an investor has a diversified portfolio.

Investment term

Lack of clarity in disclosing the exact investment term of an investment product, where the product is close-ended

Investment strategy risks

  • limited disclosure of the risks of an investment strategy, where a riskier strategy typically requires a longer time horizon for an investment

  • failure to disclose that an investor should hold an investment in a higher risk product for a longer period of time to allow time for the recoupment of losses.

Product risk 

  • understated risk level for the product

  • target market included consumers / investors who had a risk tolerance that was misaligned with the actual risks of the product.

Product performance

  • lack of disclosure on how a product is likely to perform both under conditions of market stress and average market conditions

  • issuers should not assume that past performance is always an indicator of future performance.

Withdrawal / redemption rights

Lack of clarity in disclosing withdrawal needs for an investment product such as:

  • the liquidity features of an investment product, including any limitations on the ability of a consumer to redeem their product

  • the link between liquidity and withdrawal rights

  • the usual timeframe for the issuer to process and meet a withdrawal request.

Limitations on redemptions

  • lack of clarity in disclosing limitations on the redemptions for an investment product

  • deficiencies in the alignment of limitations on the redemptions with the target market for the product.

TMD deficiencies and limitations

  • use of target market determination TMD templates where there is no customisation for the specific product

  • TMDs did not include any distribution conditions.

Distribution strategy or sales process

  • ‘choice architecture’ and distribution is in line with the target market

  • issuers should consider:

  • the context of a product’s distribution such as the website for the product, face-to-face sales design and marketing

  • how the product structure is presented for example product choices or features and how the price of a product is framed

  • failure to audit distributors’ practices

  • proper assessment of third-party distributor arrangements (platform providers, sales staff or financial advisers) - assess the capacity of distributors to comply with distribution conditions and to meet the design and distribution obligations more broadly, including the likelihood of a distributor’s conduct being inconsistent with the TMD.

Target consumer class

  • screening and information collection processes for prospective consumers

  • inappropriately shifting the onus onto the consumer

  • over-reliance on questionnaires 

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. 


  • 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.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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