1. Legal Framework

Applies to: Financial products requiring a PDS or that are regulated under ASIC Act – e.g. managed funds, credit cards, insurance, derivatives, margin lending, crypto-assets that are credit facilities.

Two core obligations:

A. Issuer – must make Target Market Determination (TMD) – s994B
TMD must be public and state:

1. Class of retail clients who comprise target market – objectives, financial situation, needs
2. Distribution conditions and channels
3. Review triggers / periods – events that suggest TMD no longer appropriate
4. Reporting and monitoring

B. Issuer and Distributor – Conduct Obligations

• s994C(4) – Issuer review obligation: If issuer knows or ought reasonably to know of event/circumstance suggesting TMD is no longer appropriate, it must cease retail distribution within 10 business days until TMD is reviewed.
• s994E(3) – Distributor reasonable steps obligation: A person who makes a TMD and any distributor must take reasonable steps that will, or are reasonably likely to, result in retail product distribution conduct being consistent with the TMD.

Failure is a civil penalty provision. Max penalty for body corporate is greatest of 50,000 penalty units – currently $15.65m (was $11.1m), 3x benefit, or 10% annual turnover. Plus s994Q – consumer loss compensation.

What are "reasonable steps"? – ASIC Regulatory Guide 274: systems, policies, training, scripts, monitoring, filtering, data analysis, supervision. Not just having a TMD on file.

2. What constitutes a DDO Breach?

1. No TMD at all – distributing without one
2. Deficient TMD – too broad, no negative target market, no distribution conditions
3. Distribution inconsistent with TMD – e.g. cross-selling investment to conservative savers
4. Failure to monitor review triggers – cancellation rates, complaints, claims ratios, losses
5. Failure to cease distribution after trigger event

3. Leading Case Law – ASIC Enforcement

ASIC has commenced 6 civil penalty proceedings to date. All have resulted in $8m+ penalties – forming a baseline.

CASE 1: ASIC v Firstmac Limited – First Distributor Case FCA 737 (liability) and FCA 12 (penalty) – $8 million[2024][2025]

Facts: Firstmac ran a cross-selling strategy. It sent High Livez PDS (mortgage-backed managed fund) and High Livez Information letters to 780 existing term-deposit holders. Term deposit is capital guaranteed, low risk. High Livez TMD said target market was consumers seeking medium risk investment who could bear loss.

ASIC allegation: Breach of s994E(3)(d) – failure to take reasonable steps that distribution is consistent with TMD.

Findings – Justice Downes:

• Firstmac had no systems to filter term deposit holders against High Livez TMD. No training on DDO, no supervision of Investment Specialist making calls, scripts inadequate.
• Steps taken were "wholly inadequate" – breakdown between management and caller.
• Each email/letter = separate contravention. Total 831 contraventions, but from 2 courses of conduct – sending documents and sending information letters.
• Conduct was objectively reckless.

Penalty Principles – 24 Jan 2025:

• Court ordered $8m despite ASIC seeking more. Mitigating: negligible actual loss, product wound up Dec 2024, Firstmac cooperated post-breach.
• Aggravating: Significant size, need for specific deterrence – Court said "a significant penalty is necessary to ensure specific deterrence by avoiding the possibility that Firstmac may perceive a civil penalty as an acceptable 'cost of doing business'". Course-of-conduct principle applied to avoid disproportionate total.

This is the leading case on reasonable steps.

CASE 2: ASIC v American Express Australia Limited FCA 784 – First Issuer Review Case – $8 million[2024]

Facts: Amex issued David Jones co-branded credit cards – DJs American Express and DJs Platinum. Distributed in David Jones stores from 2008 to July 2022.

Breach: s994C(4) – failure to review TMD when event suggests TMD no longer appropriate.

The Court accepted:

1. Amex made TMDs,
2. Ought reasonably to have known by 11 May 2022 that cancelled application rates were a review trigger,
3. Did not review TMDs between 11 May and 24 May 2022,
4. Distribution continued.

Amex admitted liability. Court imposed agreed $8m penalty plus $200k costs. Important distinction: Court did not find breach of s994C(5) (obligation to inform distributor David Jones) because that requires actual knowledge, not ought-to-know.

Lesson: Issuers must have automated monitoring of key metrics – cancellation rates, hardship, complaints – linked to TMD review triggers. RG 274 says "ought reasonably to know" is objective.

CASE 3: ASIC v Bit Trade Pty Ltd (Kraken crypto exchange operator) FCA – 24-274MR – $8 million[2024]

Facts: From Oct 2021, Bit Trade offered "margin extension" product allowing margin trading repayable in digital asset or national currency, to 1100+ Australians, without any TMD.

Legal issue: Is margin extension a financial product? Court held it is a credit facility – deferred debt where repayment in national currency = obligation to pay money. Therefore DDO applies.

Findings – Justice Nicholas:

• Complete failure – Bit Trade "did not turn its mind to the requirement of the DDO regime until these were first drawn to its attention by ASIC", indicating "seriously deficient compliance system".
• Continued offering when knew or ought to have known it was likely in breach. Motivated by revenue maximisation.
• Customers paid US$7m+ in fees/interest, suffered US$5m+ trading losses, one investor lost almost US$4m.

First penalty for failure to make TMD – s994B. Same $8m baseline.

CASE 4: ASIC v Australian Unity Funds Management (AUFM) – 2024 – $7.125m

Federal Court found AUFM breached DDO for distribution of managed fund to high-risk consumers. Penalty $7.125m – slightly lower because early admission and remediation. Reinforces that negligence still penalised.

Other regulatory actions:

• 82 DDO stop orders issued by ASIC as of 2024 – 9 issuers withdrew 11 products . Including 5 retail OTC derivative issuers.
• Civil penalty proceedings also against eToro, etc pending.

4. How Courts Assess Penalty

From Firstmac penalty decision:

1. Number of contraventions (each distribution counts)
2. Whether conduct was deliberate or reckless
3. Corporate culture conducive to compliance
4. Size and financial position of contravener – deterrence
5. Loss to consumers (even negligible loss = serious, as DDO is preventive)
6. Course of conduct – to avoid crushing penalties for single decision leading to many emails

Baseline emerging: $8m for first offences even with low consumer loss, because DDO is a preventive regime protecting public interest – ASIC calls TMD "fundamental in ensuring investors are not inappropriately marketed products that could harm them".

5. Practical Checklist to Avoid Breach

1. TMD quality: Define target market with objective factors, include negative target market, set clear distribution conditions.
2. Filtering: Before cross-selling, filter existing database against TMD.
3. Reasonable steps documentation: Training, QA calls, scripts approved by compliance, CRM blocks.
4. Trigger monitoring dashboard: Cancellation rates > benchmark, complaints > 5%, losses, broker feedback – automatic review alert within 10 business days.
5. Cease distribution protocol: Legal power to stop third-party distributors.