Funds Update - 26 July 2024

In this Funds Update for 26 July 2024:

1. Court finds breach of DDO obligations to review a TMD.
2. ASIC releases note on virtual-only meetings for companies and registered schemes.

Court finds breach of DDO obligations to review a TMD

On 19 July 2024, the Federal Court found that a financial product issuer had contravened its obligation under the design and distribution obligations (DDO) regime under section 994C(4) of the Corporations Act 2001 (Cth) (the Act) to cease issuing a financial product within 10 business days where the issuer:

• knows, or ought reasonably to know, that that a target market determination (TMD) review trigger has occurred or another event has occurred that indicates that reasonably the TMD is no longer appropriate; and
• the issuer has not reviewed the TMD and, if required, issued a new TMD.

The Court held that the issuer’s failure to actively review circumstances that may suggest the inappropriateness of an existing TMD led to the issuer not satisfying these TMD review obligations, resulting in a penalty of $8 million. This was an agreed penalty between ASIC and the issuer, which was ultimately adopted by the Court.

It is also worth noting that, in this particular case:

• the issuer monitored the cancellation rates for the credit cards for various purposes under the alliance between the issuer and the third party distributor; and
• a key priority matter for the issuer was to identify opportunities to seek to reduce the number of cancellations for the credit cards and for this purpose, the issuer and the third party distributor established a “Cancellations Working Group”. In this context, the issuer had considerable data on the cancellation rates as well as the reasons for cancellation.

On this basis, for the relevant period, the issuer was aware of a “circumstance” being the high cancellation rates for the credit cards.

While the decision is based on the issuer's admissions of contravention, the Federal Court’s judgment clarifies the level of knowledge required to enliven each obligation for product issuers under section 994C. The decision is also a reminder that the Federal Court will still scrutinise and opine on principles of law and construction, notwithstanding joint submissions to the contrary from the parties.

The decision indicates that product issuers are expected to proactively, and on an ongoing basis, monitor and consider a broad range of circumstances in the context of the ongoing appropriateness of their TMDs. This is important judicial guidance as the net of potentially relevant circumstances is wide-ranging, particularly given product issuers typically hold specific product expertise, and have access to a large variety of product metrics, customer data and market data.

The full decision is available here, and the ASIC media release concerning the decision is available here.

Back ^

ASIC releases note on virtual-only meetings for companies and registered schemes 

On 12 July 2024, ASIC published a note on virtual-only meetings for companies and registered schemes. This follows the commencement of the Treasury’s Statutory Review of the “Meetings and Documents Amendments”, which will review amendments made to the Act to allow companies and registered schemes to hold virtual meetings, electronically execute documents and transmit meeting-related documents electronically.

ASIC’s note emphasised that if companies and responsible entities of registered schemes wish to hold virtual-only meetings of members, they should ensure their constitutions have been amended to permit this and notify ASIC of the amendment if required.

We covered the Treasury’s consultation on this statutory review in a previous Funds Update. 

Back ^