The Federal Court last week handed down its decision in Australian Securities and Investments Commission v Firstmac Limited [2024] FCA 737. ASIC was successful in its claim that Firstmac Limited (Firstmac) had contravened its obligation to take reasonable steps that would have resulted in, or would have been reasonably likely to have resulted in, “retail product distribution conduct”, consistent with the target market determination for the relevant product. The obligations are part of the design and distribution obligations (DDO) in Part 7.8A[1] of the Corporations Act 2001 (Corporations Act). This is the first case to consider these obligations.
Firstmac is the distributor, manager and promoter of interests in High Livez, a registered managed investment scheme (High Livez). Perpetual Trust Services Limited (Perpetual) is the responsible entity of High Livez.
Firstmac is also a non-bank lender, primarily offering finance loans including car loans and home loans on a relatively small scale compared to other large lenders. Firstmac also distributed two Term Deposit products that were issued by BNK Banking Corporation Limited (BNK).
Perpetual and BNK Banking had prepared target market determinations that specified the target market for each of the respective products. There were key differences in the target markets for High Livez and the Term Deposits. One difference was that the Term Deposits were for an investment period of 2 years or less, whereas the suggested investment time period for High Livez was 3 – 5 years. Another difference was that High Livez was not suitable for an investor that wanted a capital guaranteed product, whereas the Term Deposits were; they had the benefit of a capital guarantee by the Commonwealth Government up to $250,000.
Between 5 October 2021, when the DDO provisions came into force, and 9 September 2022 (Relevant Period), Firstmac engaged in retail product distribution conduct by giving 817 persons (780 of whom Justice Downes held were retail clients) a product disclosure statement for High Livez. The people who received the product disclosure statement were holders of the Term Deposits that were maturing. The product disclosure statement was sent in an email from a representative of Firstmac. Although a Firstmac representative was supposed to have spoken to each person before the product disclosure statement was sent to them, this had not been done. Some Term Deposit Holders received a product disclosure statement for High Livez without anyone speaking with them to determine whether an interest in the High Livez may be suitable for them. Firstmac also failed to take other steps that the case suggests would have discharged the reasonable steps obligation, leaving Justice Downes to hold that Firstmac had not taken reasonable steps to ensure that the retail product distribution conduct was consistent with the target market determination for High Livez.
The statutory requirement is set out in subsection 994E(3) of the Corporations Act. It provides that:
“If:
(a) a target market determination for a financial product has been made; and
(b) the product is on offer for acquisition by issue, or for regulated sale, to retail clients; and
(c) a regulated person engages in retail product distribution conduct in relation to the product; and
(d) the regulated person failed to take reasonable steps that would have resulted in, or would have been reasonably likely to have resulted in, the retail product distribution conduct being consistent with the determination;
the regulated person contravenes this subsection unless the retail product distribution conduct is excluded conduct.”
Justice Downes considered in detail the construction and meaning of the section 994E. Her Honour held that the phrase “would have resulted in, or would have been reasonably likely to have resulted in” constituted two separate concepts, and, in order for the obligation to have been breached, a person must have failed to take reasonable steps that either:
(a) would have resulted in the RPDC being consistent with the relevant TMD, or
(b) would have been reasonably likely to have resulted in the RPDC being consistent with the relevant TMD. Her Honour determined that this meant that there was “a real and not remote chance of” the RPDC being consistent with the relevant TMD.
Justice Downes applied the jurisprudence of previous cases that considered statutory language using “reasonable steps”, including cases that considered sections 961L and 963F of the Corporations Act and noted that:
“Whether the requirement to take ‘reasonable steps’ has been met is to be determined objectively by reference to the standard of behaviour expected of a reasonable person in the regulated person’s position that is (or was) proposing to engage in the relevant retail product distribution conduct regarding the same product, and is (or was) subject to the same legal obligations.”
In the context of section 994E, the Court was to take into account “all relevant matters” including those prescribed by subsection 994E(5). Her Honour noted further that the temporal element of the obligation was forward looking. This meant that the steps had to be taken before the retail product distribution conduct occurred. In this case, it meant that the reasonable steps had to have occurred before the product disclosure statement was given to a retail client – they could not be concurrent with giving the product disclosure statement or occur after the product disclosure statement had been given.
ASIC pleaded that Firstmac ought to have done the following to satisfy its reasonable steps obligation:
a. obtained information from the relevant TD Holder to the effect that they did not, then, hold a capital guaranteed objective or a short investment timeframe objective; or
b. directly communicated to the relevant TD Holder that, generally, the High Livez product was unlikely to be appropriate for investors with a capital guaranteed objective or a short investment timeframe objective, and did so explicitly and in a manner that was reasonably likely to come to the attention of, and be understood by, the TD Holder;
a. would include sales scripts for inbound and outbound calls with guidance on their use and which would incorporate mandatory questions, warnings and disclosures, checklists or operating guidelines, customer call centre procedures, customer complaint management procedures and processes, and a statement of governance and compliance responsibilities for each level of relevant staff involved in the distribution of High Livez;
b. would be consistent with the DDO and the DDO Policy;
c. would require relevant staff, in communications with potential investors, to ascertain from those potential investors their consumer attributes; and/or inform consumers that generally the High Livez product was unlikely to be appropriate for investors with a capital guaranteed objective or a short investment timeframe objective;
ASIC alleged that Firstmac did not take any steps, including those listed above. Firstmac pleaded in its Defence that it had taken a series of steps that amounted to reasonable steps, but the evidence did not support Firstmac’s pleadings. After detailed analysis of the evidence provided by witnesses and on cross examination, Her Honour held that “the steps which Firstmac took were wholly inadequate to meet the statutory obligation imposed by s 994E(3)(d)”.
The steps that ASIC pleaded Firstmac ought to have taken are instructive and informative; possibly more so than the guidance in ASIC Regulatory Guide 274 Product design and distribution obligations (RG 274).[2] Table 6 in RG 274 provides a list of general factors for a distributor to consider when examining its reasonable steps obligation. These include compliance with distribution conditions, distribution method, marketing and promotional materials, effectiveness of product governance, inappropriate incentives, training of staff, and assessment of whether a consumer is in the target market. Admittedly, guidance on complying with the legislative requirements will be difficult given that a distributor must take into account all relevant factors, including risk of inconsistency with the target market determination, the nature and degree of harm that might result from the inconsistency and mitigations steps. Yet, much of the distribution of managed funds in Australia – especially that involving platforms – is relatively standardised and may be capable of more precise guidance on what can be done, in particular by an issuer, to satisfy the reasonable steps obligation.
In this case, the steps pleaded by ASIC are more specific and are tailored to Firstmac’s conduct and the situation with its clients. The list of steps suggest a relatively high level of information gathering is to be carried out by the distributor. While Firstmac was a relatively small operation where a single person was supposedly intended to speak to every person before they were sent a product disclosure statement, this was found not, in fact, to have occurred. In the context of interests in funds being distributed through a platform, it is questionable how much information would be obtained by the platform before engaging in the retail product distribution conduct. Knock-out questions are more likely to be administered and effective. This was one step that Firstmac implemented after the Relevant Period at issue in this case. It is instructive that ASIC did not take issue with them. They would also be consistent with Her Honour’s holding in this case that different steps can be taken in different context to satisfy the reasonable steps obligation in section 994E of the Corporations Act.
The obligation to take reasonable steps to ensure that retail product distribution conduct is consistent with the target market determinations for a financial product is not limited to a distributor; it is also imposed on the issuer of the financial product. Perpetual was the issuer of the product in this case, but ASIC did not claim that Perpetual failed in its obligation to take reasonable steps to ensure that retail product distribution conduct was consistent with the target market determinations. The case does not disclose what steps Perpetual took, if any, that would have resulted in, or would have been reasonably likely to have resulted in, Firstmac’s retail product distribution conduct being consistent with the target market determinations for High Livez.
RG 274 states at paragraph 131 that:
“The exact nature of the steps an issuer should take will ultimately depend on the nature of the product and the circumstances of its distribution, including any distribution conditions and restrictions, as well as any information or data the issuer or distributor may have access to. In determining the nature of the reasonable steps required, issuers and distributors should assess the risk of a consumer receiving the product on a standalone basis and the potential harm for consumers if that were to occur.”
We may need to wait for a case against an issuer before we have more detailed guidance on what specific actions would satisfy the reasonable steps obligation (at least in the context of the particular case).
While the case provides some guidance on what constitutes reasonable steps by a distributor engaging in retail product distribution conduct by giving a product disclosure statement (at least in the context of a relatively small operation), it also leaves a number of questions unanswered. One question is whether making the product disclosure statement available on a website amounts to giving a person a product disclosure statement under Part 7.9 of the Corporations Act and therefore constitute retail product distribution conduct?[3] Should an issuer or distributor permit a product disclosure statement to be available on a website without taking any steps to determine whether doing so would be consistent with the target market determination (i.e. determining whether the person is within the target market for the product)?
Section 1015C of the Corporations Act specifies how a product disclosure statement is to be given under Part 7.9 of the Corporations Act. It requires that a product disclosure statement be:
(a) given to a person, or the person’s agent, personally; or
(b) sent to the person, or the person’s agent, at an address (including an electronic address) or fax number nominated by the person or the agent.
Section 1015C specifies the only circumstances in which a product disclosure statement is “sent” to a person for the purpose of the section 1015C. It does not similarly limit the circumstances in which a product disclosure statement is “given” to a person. On the contrary, section 1015C(4) provides that the Corporations Regulations 2001 (Cth) (Corporations Regulations) may provide for alternative ways of giving a product disclosure statement to a person.[4]
Corporations Regulation 7.9.02A provides that a product disclosure statement may be given to a person by making the product disclosure statement available to the person (or their agent) in any way that is agreed to by the person and allows the regulated person (i.e. the issuer or distributor) to be satisfied, on reasonable grounds, that the person (or their agent) has received the product disclosure statement. Corporations Regulation 7.9.02B has further requirements that need to be considered for electronic documents.
Corporations Regulations 7.9.02A and 7.9.02B, as well as the terms of access of a website, will need to be taken into account when considering whether making a product disclosure statement available on the website amounts to “giving” a product disclosure statement and therefore retail product distribution conduct for the purpose of the DDO reasonable steps obligations. If it is concluded that making a product disclosure statement available on the website amounts to “giving” a product disclosure statement, disclosures that occur concurrently with or as part of the product disclosure statement are not capable of constituting reasonable steps.
[1] The DDO, Part 7.8A of the Corporations Act, came into force on 5 October 2021. [2] In Australian Securities and Investments Commission v Commonwealth Bank of Australia [2022] FCA 1422, ASIC alleged that CBA had breached, among other things, its obligation to do all things necessary to ensure that the financial services covered by its licence were provided efficiently, honestly and fairly. Justice Downes was also the judge in that case. Her Honour held that ASIC had not made out its case against CBA because, among other things, ASIC had not submitted any evidence as to what CBA ought to have done in order to have discharged the obligation; ASIC had not identified any actions that CBA ought to have taken. [3] Retail product distribution conduct is defined to include giving a product disclosure statement under Part 7.9 of the Corporations Act to a retail client. [4] This could be interpreted as limiting the ways in which a product disclosure statement can be given (i.e. only the Corporations Regulations can specify an alternative way in which it is given).
Welcome to Digital Bytes, our latest quarterly update on current developments in cyber, privacy and data governance.
The Federal Court has found in favour of ASIC against digital currency payments provider BPS Financial Pty Ltd over its Qoin Wallet product. We unpack the Court’s findings and comment on the...
In proceedings brought in the Federal Court of Australia, ASIC has successfully established that one of the world’s largest investment managers contravened the ASIC Act when it made a series of...