ASIC’s first civil penalty case alleging breaches of the design and distribution obligations (DDO) reveals some critical learnings for fund managers about monitoring review triggers and the steps which must be taken if one occurs.

On 5 December 2022, ASIC commenced proceedings in the Federal Court against American Express Australia Limited (Amex) in relation to its credit cards co-branded with David Jones. This follows the corporate regulator taking multiple actions under the DDO regime, including issuing more than 20 interim stop orders (see our recent article for our latest learnings).  

Here, Sean McMahon and Jeunesse Meldrum explain ASIC’s allegations and what fund managers need to know now.

Key takeaways

1. A target market determination (TMD) must be such that it would be reasonable to conclude that if a product is issued to investors in accordance with the distribution conditions, then it would be likely those investors were in the target market.  In this case, ASIC has alleged Amex’s TMD did not satisfy these requirements and was therefore not a TMD at all.
2. Having identified a review trigger has occurred, you must conduct a review of your TMD (and if appropriate, make a new one) as soon as possible. This is because once a review trigger occurs, unless you have reviewed the TMD (and if appropriate, made a new one), the law requires you to do the following as soon as practicable but no later than 10 business days:
   • Stop accepting applications and issuing units.
   • Take all reasonable steps to ensure your distributors are informed they must not continue distributing your fund until further notice.

ASIC’s allegations

ASIC alleges Amex contravened the Corporations Act (Act) as follows:

1. Amex failed to include distribution conditions in its TMD which meant it was not reasonable to conclude if the credit cards were issued to consumers in accordance with the distribution conditions, it would be likely consumers were in the target market. Because the TMD did not include distribution conditions it was not a TMD at all.
2. Amex failed to cease issuing the credit cards in circumstances where Amex knew, or ought reasonably to have known, the cancellation rates and complaints from consumers were a review trigger or were an event or circumstance that would reasonably suggest the TMD was no longer appropriate.
3. Amex failed to take all reasonable steps to ensure its distributor discontinue distributing the financial product in circumstances where Amex knew the cancellation rates and complaints from consumers were a review trigger or were an event or circumstance that would reasonably suggest the TMD was no longer appropriate.

What does it mean for fund managers?

While this case relates to the distribution of a credit card product, there are some ‘learnings’ for fund managers, particularly in relation to the importance of monitoring review triggers and the steps which must be taken should one occur.

Fund managers who issue products to retail clients must prepare TMDs for these products and the TMDs must specify events and circumstances (review triggers) that would reasonably suggest the determination is no longer appropriate. If one of these review triggers were to occur, then the fund manager must do the following as soon as practicable, but in any event within 10 business days:

• Review the TMD.
• If having completed the review the fund manager determines changes are required, then it must make a new TMD.

If the fund manager fails to undertake the review process above (as soon as practicable, but in any event within 10 business days), then it must stop accepting applications and issuing units, and must take all reasonable steps to ensure distributors are informed they must not continue distributing the Fund until further notice.

Review triggers

The following are standard review triggers suggested in the Financial Services Council Target Market Determination (Funds Management) Template:

1. Material change to key attributes, fund investment objective, and/or fees.
2. Material deviation from benchmark / objective over sustained period.
3. Key attributes have not performed as disclosed by a material degree and for a material period.
4. Determination by the issuer of an ASIC reportable ‘significant dealing’.
5. Material or unexpectedly high number of complaints (as defined in the Act) about the product or distribution of the product.
6. The use of Product Intervention Powers, regulator orders, or directions that affect the product.

In addition, fund managers should turn their minds to specific review triggers which are appropriate having regard to the key features and attributes of their products and to have a document for each product (eg a ‘DDO Plan’) which sets out the objective criteria the fund manager applies to measure the review triggers specified in the TMD.

It is important fund managers maintain systems which allow them to gather and assess data in relation to the review triggers as part of DDO compliance. 

Background to the Amex case

This is an issue ASIC may have had its eye on for some time. The co-branded credit cards issued by Amex in partnership with David Jones were first offered to consumers in August 2008 and September 2012.  The arrangement included Amex paying commissions to David Jones for each card activated by a consumer. David Jones displayed point of sale promotion materials and application forms for the cards and occasionally cards were promoted by offering consumers a discount on their purchases if they applied for the card at the point of sale. David Jones paid incentives to its staff in relation to the cards.  This was the main distribution channel for the cards (approximately 80 percent to 90 percent of all cards issued) with the balance of cards issued in response to applications derived online.

There was historically a high cancellation rate in relation to cards issued to consumers who had applied at David Jones stores, compared with cards applied for online. ASIC says Amex was aware of a large number of consumer complaints and one of the key reasons for the high instore cancellations was consumers did not understand they were applying for a credit card, rather than a loyalty card.

ASIC says in preparation for compliance with DDO during 2021, Amex sought to ‘retrofit’ TMD requirements to products like the credit cards that had been in the market for many years. Apparently, Amex conducted ‘critical assessments’ which revealed the credit cards were not fit for purpose as the membership benefits associated with the cards needed to be refreshed.  Nevertheless, Amex did not update or amend the ‘key eligibility criteria’ for the cards, nor did Amex change the features or membership benefits.

On 5 October 2021, American Express made a TMD for the cards which included the following:

1. Target market – consumers looking to make purchases on credit with a card that earns either membership rewards points or QANTAS points and David Jones benefits.
2. Distribution conditions – the TMD referred to the channels through which the cards were available (eg in-store and online) and that consumers must meet the product’s key eligibility requirements.
3. Key eligibility criteria – consumers must satisfy minimum annual income and citizenship/residency requirements, pass responsible lending checks, and be aged 18 years or over.
4. Review triggers – included material or unexpectedly high number of complaints and abnormal cancellation rates.

ASIC considers the key eligibility criteria, and therefore the distribution conditions, did not include criteria to limit the distribution to consumers who are looking to make purchases on credit with a card that earns reward points or other benefits in accordance with the stated target market. It is for this reason ASIC alleges the document is not a TMD at all.

ASIC also says that knowing of the high cancellation rates and number of complaints, Amex should have ceased issuing the cards and taken all reasonable steps to ensure David Jones was informed that it must not continue distributing the cards.

Instead, Amex issued 9,561 cards from October 2021 to 30 June 2022 and 4,918 cards from March 2022 to June 2022. ASIC says this is relevant to harm suffered and allege Amex’s failure to make TMDs in accordance with the requirements of the Act, and its failure to cease issuing the cards, exposed consumers who took out the cards to the risk that they obtained a financial product which was not appropriate to their needs and objectives.

Reach out to us

We can help you with—

• engaging with your compliance plan auditor about how they intend to approach DDO in your schemes’ next compliance plan audits
• conducting a desktop audit of your DDO policy and its implementation.

If you need help or have any questions, please reach out to us.