Funds Update - 14 June 2024

In this Funds Update for 14 June 2024:

1. ASIC issues stop order due to DDO questionnaire concerns.
2. Federal Court finds that super fund trustee made misleading ESG claims.
3. Federal Court grants relief from civil penalty for providing a financial product without an AFSL.
4. ASIC cancels AFSL of over-the-counter derivatives issuer.
5. Treasury opens consultation on draft Quality of Advice regulations.

 

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ASIC issues stop order due to DDO questionnaire concerns

On 5 June 2024, ASIC announced that it had made an interim stop order against a mortgage fund issuer, for failing to take reasonable steps likely to result in its retail product distribution conduct being consistent with its target market determination (TMD).

ASIC considered that the issuer had relied upon an inadequate DDO questionnaire as a key step for compliance with its reasonable steps obligations. ASIC considered that:

• the questions and response options were based on complex consumer attributes set out in the TMD, which was not intended to be a consumer-facing document, and therefore there was a high risk that retail clients would not understand the questionnaire;
• the questionnaire gave prompts disclosing which response placed the consumer inside or outside the target market; and
• the issuer had follow-up telephone conversations to provide consumers with further opportunities to amend their response and fit within the target market.

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Federal Court finds that trustee made misleading ESG claims

On 5 June 2024, the Federal Court published its judgment finding that a superannuation trustee had engaged in misleading or deceptive conduct by making claims that it had eliminated investments that posed risks to the environment and community, including in investments relating to gambling, tobacco, oil tar sands, Russia and coal mining. The Court found that the alleged misleading or deceptive conduct had been established, other than in relation to the representations about tobacco investments.

Key takeaways from the case were that:

• the Court held that an ordinary reasonable consumer would not have read the broad statements made on the fund’s website as being subject of potential qualification by its responsible investing policy which was “two clicks away” including because the “emphatic statements made… did not admit of the possibility that they were subject to any terms and conditions”. The Court said that “Absent some indicator on the face [of] it, such as a footnote or asterisk with some accompanying statement that the apparently unqualified language was, in fact, something that was subject to qualifications or limitations, they would have not had reason to [search around for some investment policy that might qualify the statements]”;

• the relevant question was not how research providers such as MSCI classified concepts such as a ‘tobacco company’, but what an ordinary reasonable consumer would understand those terms to mean. The relevant companies invested in were suppliers of packaging to tobacco companies, who only derived a small portion of their revenue from tobacco companies. The Court stated that “the ordinary reasonable consumer would not regard an investment in a company that derived between 1.5% and 11% of their revenue from supplying packaging to tobacco companies as being a ‘tobacco company’ or a company engaged in the manufacture or production of tobacco. Such a consumer, in my view, if asked about it would say, ‘no, they are packaging companies’”; and
• the Court rejected arguments that:
  • an ordinary reasonable consumer would draw a distinction between direct and indirect investments including because there was nothing in the fund’s documents which suggested that the claims that there was, for example, “No Way” the trustee would invest members’ funds in gambling, tobacco etc was to be read subject to a proviso that there was a way in which it would do exactly that, by investing indirectly, not directly; and
  • a not-for-profit superannuation fund, where any profits from its activities are reinvested for the benefit of its members, was not operating in trade or commerce.

The full decision is available here.

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Federal Court grants relief from civil penalty for providing a financial product without an AFSL

On 4 June 2024, the Federal Court published its judgment in a case concerning whether a cryptocurrency product provider should be relieved of liability for a civil pecuniary penalty order issued under section 1317S of the Corporations Act 2001 (Cth) (the Act).

ASIC had successfully established that the provider had breached the Act by offering its product without an Australian financial services licence (AFSL) or being registered as a managed investment scheme.

Justice Jackman decided that the provider should be granted relief from the civil penalty under section 1317S, because the provider had acted honestly in considering whether the product required an AFSL and had made a genuine attempt to comply with the Act. In coming to this conclusion, Jackman J observed that the provider had obtained legal advice from a large law firm which did not identify any risk of breaching the law.

For more information, please see our article here. The full decision is available here.

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ASIC cancels AFSL of over-the-counter derivatives issuer

On 6 June 2024, ASIC announced that it had cancelled the AFSL of a retail over-the-counter derivatives issuer, which had offered contracts for difference and foreign exchange contracts.

ASIC cited multiple reasons for cancelling the licence, including that the issuer had failed to take reasonable steps to ensure its retail product distribution conduct was consistent with its TMD.

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Treasury opens consultation on draft Quality of Advice regulations

On 11 June 2024, Treasury opened consultations on the draft Treasury Laws Amendment (Delivering Better Financial Outcomes Regulations 2024. These regulations are intended to deliver the first tranche of the government’s response to the Quality of Advice review.

The consultation is open for responses until 8 July 2024.

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