9 reasons your TMD might be defective
Despite the industry-wide effort that went into the FSC standardised template for Target Market Determinations, including extensive consultation with ASIC, it now appears a serious mismatch has developed between existing TMD’s and ASIC’s expectations. To see such a conflict emerge between an accepted industry approach and ASIC’s views is highly unusual – but the result is that many issuers who thought they were following the accepted industry process may now be on the wrong side of the regulator.
Regardless of whether one agrees with ASIC’s approach (we certainly have our issues with it), the hard reality is that many issuers will now need to review their DDO procedures, starting with their TMDs. ASIC is armed with a range of enforcement powers, including stop orders and court proceedings, and has been very clear that they are not afraid to use them – in fact they have done so already on several recent occasions.
What does this mean for issuers and distributors?
It means you may (very reasonably) think that you’ve been doing the right thing, but your TMD could be materially deficient. To help you work it out, we’ve set out 9 factors to look out for below – so dust off your Target Market Determination(s) and get ahead of the game!
1.Your TMD isn’t customised
If you used the FSC TMD template (which you almost definitely did), then there’s a good chance you didn’t customise it much. Especially if you think of your fund as ‘vanilla’ or ‘standard’ (perhaps you have an equities fund) – and so it seemed the template was fit for purpose without the need for amendments. It now appears that approach is problematic.
ASIC are taking issue with generic content in TMD templates and expect most issuers to customise their TMD based on their specific product.
2. Your TMD includes an amber rating
ASIC hates amber – fundamentally they think it’s lazy. ASIC has cautioned issuers from ‘sitting on the fence’ and advised they should not include consumers that are ‘potentially’ captured in their target market. ‘Potentially’ including consumers in the target market is likely to result in a TMD failing to meet the appropriateness requirements.
We have seen many issuers stop using Amber altogether in their TMD indicators, which we understand is ASIC’s preference.
3. Your portfolio allocation range is broad (e.g. 25-75%)
The FSC TMD template encourages the use of broad portfolio allocations – but this has now been a factor in many recent stop orders issued by ASIC. ASIC believes a broad portfolio allocation range should not be used as it can capture unsuitable consumers in the target market.
Portfolio allocation should be described with sufficient granularity and will often need to go going outside the standardised allocation ranges in the TMD template.
4. Your product is exposed to equities – or worse…
ASIC believes high-risk products should not include consumers with a medium risk tolerance. And yes, ASIC considers equities to be at least high-risk. Things only get more complicated once you get into the realms of micro-cap, real-estate development, private equity, or crypto. Under the current TMD template, all of these are generally bundled together, but ASIC is indicating that may no longer be good enough. For example, you may need to add a very high-risk category, or change the pre-set portfolio allocation of a satellite/small allocation from 25% to a lower number (e.g., 5% or 10%).
5. Your fund is allowed to borrow, short-sell or use derivatives
A lot of boutique fund managers have retained the option to use these tools even though in many cases they don’t use them. If that’s you, it may be time to re-evaluate, as these features can push you into a whole other risk category.
6. You have a high-risk product with a shorter investment time-frame
It may be old-school thinking, but ASIC has a strong view that investors should hold higher risk products for a long time-frame.
7. You use the Standard Risk Measure
You probably do – because that’s what the FSC template tells you to use when assessing the risk of your product. The problem is, ASIC doesn’t like the SRM – and we’ve seen them express that view before issuing stop orders, in particular to funds with unconventional assets (e.g. Crypto). ASIC has stated that risk is multi-faceted, and the use of a single measure may be problematic.
In any assessment of a product, ASIC advises issuers to consider indicators of risks including the drawdown (the quantum of negative returns when they are observed), returns volatility, and the risk that returns may be positive but not meet a consumer’s objectives, financial situation and needs. Issuers should also be considering potential performance under different market conditions.
8. You have limited Distribution Conditions - or none at all
Many issuers have taken the approach that their product is fairly standard (like say an Australian Equities Fund) so it doesn’t need distribution conditions. ASIC does not appear to agree with that approach. Most issuers will need to introduce at least some distribution conditions. This could include a questionnaire or ‘knockout’ questions to determine if a consumer is unlikely to be within the target market, restricting a product’s distribution to personal advice and/or platforms, or restricting a product’s distribution to certain distributors that have been subject to due diligence by the issuer.
9. You have no TMD review triggers or these are not well defined
The reality is that most funds get very few complaints, or other tangible indicators that their product is being distributed out of the target market, and as a result review triggers are rarely triggered. However, the lack of triggers has now made it onto ASIC’s radar, and its likely review triggers will need to be revisited by many issuers. Some less common triggers that may need to be considered include changes in product performance, withdrawals or economic conditions.
A good time to act… is now
The best time to fix your TMD is before ASIC decides you should. If you would like to discuss your TMD with us, please send us a message. We would be happy to give you our initial assessment at no cost.