Trends in ASIC's interim stop orders and implications for review product processes and governance frameworks

In brief - In the final article of our three-part series examining ASIC's review of how investment product issuers are meeting their design and distribution obligations (DDO), we take a closer look at the interim stop orders issued by ASIC to assess if there are commonalities or trends in the regulatory approach and comment on the implications for product governance and product review arrangements.

Trends in ASIC's regulatory approach

ASIC - compliance and governance

The recent action by ASIC underlines the importance of ensuring that:

• From an issuer's perspective, the TMD:
  • is accurate and up to date 
  • aligns the investment product and its characteristics (including risk characteristics) with the target consumer group and their risk profiles
• From an issuer and distributor's perspective, the distribution arrangements should reference back to the TMD and pick up any significant dealing occurring outside the target market.

Given that the needs of a class of consumers are likely to change over time, the obligation of both issuers and distributors is to develop and maintain effective product governance arrangements.

Review triggers

The above analysis also reinforces the importance of review triggers. 

A TMD must specify review triggers which are events and circumstances that would reasonably suggest that the TMD is no longer appropriate. 

Review triggers:

• are likely to differ based on the nature of the financial product and its intended target market, including the way it is distributed
• prompt the issuer to stop distributing the financial product (and direct the issuer’s distributors to stop distributing) until the TMD is reviewed for realignment with the target market. 

Overall governance guidance arising from Report 762 and ASIC's imposition of stop orders

The imposition of stop orders and ASIC's approach to identifying defects and areas for improvement in investment products and acceptable remediation responses highlight the importance and the obligation of both issuers and distributors to develop and maintain effective product governance and product review arrangements.

ASIC Report 762 found that all issuers had arrangements for meeting their review obligations, but issuers could improve on their use of review triggers and the process undertaken to conduct a review.

Under s994C issuers must review a TMD: 

• at the end of the review periods in the TMD
• in response to review triggers (i.e., events or circumstances that would reasonably suggest the TMD is no longer appropriate) 
• when other events or circumstances occur that which reasonably suggest that the TMD is no longer appropriate.

The general obligation under the DDO regime is that an issuer must respond to adverse review findings or that the investment product is not operating as intended or presents significant consumer harms including:

• to change a product’s design, target market or distribution arrangements, or cease offering the product
• to remove the investment product from the market and direct distributors to stop distributing the product as soon as practicable.

This underlines the importance of and the necessity for issuers to implement and operate active review procedures (both periodic reviews and reactive reviews in response to review triggers or other events or circumstances) and to consider a range of factors that can help them identify if a TMD is no longer appropriate.

In this regard, ASIC reinforced that issuers should consider tailoring their review framework to best ensure they can identify areas of likely consumer harm and any changes required by the managed investment scheme or TMD.