ASIC crackdown commences – is your TMD appropriate?

ASIC’s design and distribution obligations have been in place for just over 12 months.  In this time, ASIC has issued 10 interim stop orders targeting inappropriate target market determinations (TMDs). Fresh in the crosshairs of ASIC are regulated financial products with underlying digital-asset exposure.  ASIC has taken its role as consumer protector very seriously when it comes to digital-assets, identifying that digital-assets are inherently high-risk and as such, where offered to retail clients, the risks associated with the product need to be clearly communicated to customers and only offered where appropriate. 

ASIC has now issued three new interim stop orders to Holon Investments Australia Limited (Holon) and their digital-assets funds.  We take you through some of the key points that ASIC considered and provide some thoughts for ongoing compliance with the TMD obligations. 

TMDs were introduced on 5 October 2021 as part of the Design and Distribution Regime (DDO).  Generally, there is a prohibition on selling a financial product to a retail client outside of the identified target market.  In addition, the target market must only include those customers that the product is appropriate for (as an example, an individual without a motor vehicle is unlikely to be in the target market for car insurance). 

Which Holon funds were given an interim stop order? 

Holon offers four funds to the public (including, the Holon Photon Fund ARSN 633 803 497, that is, a fund investing in globally listed equities).  However, only the following three Holon digital-assets funds (together known as the Funds) were the subject of the ASIC interim stop order:

  • Holon Bitcoin Fund ARSN 659 090 294
  • Holon Ethereum Fund ARSN 659 090 516, and
  • Holon Filecoin Fund ARSN 659 090 614.


What is an interim stop order?

Broadly, an interim stop order is a temporary order to stop offering or distributing a product issued by ASIC.  In this case, Holon is prohibited from issuing interest in the Funds, giving retail clients a product disclosure statement (PDS), providing general advice or otherwise recommending investment in the Funds for a period of no more than 21 days. 

Why did ASIC issue an interim stop order?

ASIC made the interim stop orders to protect retail investors from potentially investing in the Funds (noting that, the Funds may not be suitable for their financial objectives or needs).  Broadly, ASIC is concerned that the prepared public TMDs do not accurately identify the target market for the Funds.  

What are ASIC’s concerns?

ASIC believes that the target market for the funds is too broad, and that Holon did not appropriately consider the features and risks of the funds. In particular:

ASIC considers that the Funds are not suited to the wide target market defined in the TMDs, which includes investors:

  • with a potentially medium, high or very high risk and return profile; and
  • intending to use the fund as a satellite component (up to 25%) of their investment portfolio; and
  • [also] intending to use the fund as a solution/standalone component (75-100%) of their investment portfolio.

We believe that part of ASIC’s concern is that the identified target market does not match the description provided for the appropriate target market (for example, one part of the TMD notes that the Funds should be used as a satellite/small allocation of investment, however, another part notes that the Funds should instead be used by investors as a standalone/solution investment).  The TMDs noted that each of the Funds may experience up to 6 negative returns over a 20-year period. It is likely that ASIC took the view that only consumers with a “Very High” (and/or “High”) risk appetite should be in the target market whilst those with a “High” risk appetite should instead be considered as only potentially in the target market.  Given the risk profile of the Funds, any investment in the Funds should not represent a significant percentage of a retail client’s investment portfolio. 

What does Holon have to do?

Holon has 21 days to amend their documentation to the satisfaction of ASIC.  A failure to do so will likely result in ASIC issuing a final stop order.  As stated above, in the 12 months that the DDO regime has been operating, ASIC have issued 10 interim stop orders.  Note that 4 orders have been lifted so far. 

What does this mean?

There are quite a few takeaway considerations from this latest ASIC notice.  The introduction of the DDO regime requires product issuers (be it funds, insurers, lenders or banks) to consider how their product will benefit a particular class of customer.  It is important for all product designers to accurately assess their products against the risk profile of their customers.  It is not sufficient to merely note that a financial product is relatively low risk in comparison to another product, therefore the product should be considered a low-risk financial product.  Instead, product designers need to actively consider their customers in assessing their risk profile. 

As it relates to the digital-asset industry:

  • It reaffirms that ASIC is surveilling the digital-asset sector more closely than before, specifically when it comes to any retail client products.  This is consistent with ASIC’s position in its recently published corporate plan.
  • ASIC is investigating various digital-asset business for errors in relation to the issuance and distribution of financial products and making those public (where previously we would have otherwise expected ASIC to initiate conversation/correspondence and resolve issues with the business on a confidential basis).

As it relates to the financial services industry as a whole:

  • ASIC is now closely reviewing TMDs that are in the market (particularly for high-risk products) to ensure that they have correctly identified the target market.
  • It is important to consider not only who is in the target market for a product, but also who is not in the target market and how your TMD and product distribution methods are designed to ensure only those within the target market are being sold the product.


How can we help?

We are now 12 months on from the introduction of the DDO regime and are in the start of the first review period for most TMDs on the market.  It is important that you confirm that your TMD continues to accurately identify who the product is suitable for, who the product is not suitable for and how the product is distributed to ensure that you continue operating in a compliant way.

It is worth ensuring that sufficient rigour is applied in preparing and reviewing your TMD, if you would like assistance reviewing your existing TMDs or if you are preparing for a new product launch and want to stress test your TMD, please get in touch. 

For more information, please contact Erik Setio, Michele Levine, Charmian Holmes, Simon Carrodus, Brendan Ivers, Jaime Lumsden or Nicholas Pavouris.

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Senior Associate

Partner, Head of Funds and Financial Services

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