What makes a good TMD?

Having already enacted 11 interim stop orders regarding target market determinations (TMDs), the industry should not expect the Australian Securities and Investments Commission (ASIC) to slow down on its activity.

The Design and Distribution Obligations (DDO) regulations had been in place for a year now and ASIC was taking a particular interest in the TMDs of funds. These ensured a fund set out the class of consumer a financial product was likely to be appropriate for.

Some 11 interim stop orders had already been issued to funds investing in cryptocurrency and real estate among others.

ASIC executive director Greg Kirk, said: “One year on, a big focus on the industry has been to get the TMDs in place. I think the power of this regime is not just the initial cultural shift, but that it will be an iterative process. You have to monitor the outcomes, find out what is going well or going badly and then you can do something about that. I think the standard, over all, will go up over time”.

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Speaking to Money Management, Michael Mavromatis, partner at Holley Nethercote, said there was unlikely to be a slowdown in ASIC’s enforcement activity in this space.

“For what we can see from ASIC, it is concerned about high-risk products or specialised products which are unsuitable for a wide market, those that may be illiquid or highly volatile.”

He suggested a possible reason for the failures could be that firms were using standard industry templates to write their TMDs and failing to account for the niche nature of their products. While templates were not a bad thing, there could be parts which were irrelevant or unsuitable for that type of fund.

“There is nothing wrong with using a template but it needs to be fit for purpose, it shouldn’t be a box-ticking exercise. A TMD requires a description of a specific target market and it is very important that it meets the requirements.

“A useful option could be negative target markets where a fund excludes certain clients.”

A negative target market was not a legal requirement but could help to document classes of consumers for whom the product was unsuitable and be a useful guide for distributors.

After being issued with an interim stop order, firms had 21 days to rectify the issue and make the appropriate changes.

For firms putting together a TMD, Mavromatis said there were several tips to producing a successful one:

• Using a template as a starting point;
• Taking great care to determine a target market;
• Addressing why a product could be consistent with the likely objectives;
• Ensuring it met the technical requirements; and
• Considering a negative target market.