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The federal court has ordered the non-bank to pay $8 million in penalties for failing to meet its design and distribution obligations .
The federal court has ordered Firstmac Limited to pay an $8 million penalty for contravening section 994E(3) of the Corporations Act, marking the first civil penalty against a distributor involving breaches of its design and distribution obligations (DDOs).
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DDOs - which commenced in October 2021 — require firms to design financial products that meet the needs of consumers and to distribute those products in a more targeted manner.
A target market determination (TMD) — a public document that sets out the class of consumers that a financial product is likely to be appropriate for (target market) and other matters relevant to the product’s distribution and review — is a mandatory requirement of the DDO.
Background to the penalty
According to the court case, brought by financial services regulator in 2022, Firstmac failed to take reasonable steps that would have resulted in, or would have been reasonably likely to have resulted in, distribution of its High Livez investment product to term deposit holders being consistent with its target market determination (TMD). (The High Livez was wound up in December 2024).
In July 2024, the court found Firstmac implemented a ‘cross-selling strategy’ of marketing investments in High Livez (a registered managed investment scheme) to 780 consumers who held existing term deposits with Firstmac.
In doing so, the lender was found to have breached its DDO when it sent product disclosure statements (PDS) for the Firstmac High Livez to those existing term deposit holders from October 2021 to September 2022, without first taking reasonable steps to ensure consistency with its TMD for the product.
It identified 831 contraventions.
Overall, the court determined that the steps Firstmac took were inadequate to meet the statutory obligation imposed by the DDO legislation.
As such, when handing down her penalty decision on Friday (24 January), Justice Downes found that Firstmac "courted the risk" that the High Livez PDS would be distributed to a person who fell outside the target market for High Livez and that its conduct was "objectively reckless".
Firstmac had accepted that a penalty was warranted and suggested that a $4 million penalty would have been appropriate (far below the $25 million penalty ASIC had been seeking).
On Friday, the judge said the appropriate pecuniary penalty was $8 million, noting that ASIC's proposed $25 million was "excessive", particularly as the legislation was untested.
However, she judged that a substantial penalty was necessary given the lack of adequate systems, policies, practices and procedures to identify risks or breaches, and to "achieve general deterrence" by ensuring the penalty is not seen by other large corporations as a mere "cost of doing business".
“Firstmac’s conduct fell short of the standard required by the DDO and increased the risk of harm to consumers to whom the High Livez PDS was inappropriately distributed,” Justice Downes said.
"Other companies in the financial services industry in Australia will likely be aware of the penalty imposed on Firstmac in this case. As such, the penalty in this case will provide guidance to market participants as to the likely implications of contravening this provision. In this context, it is essential that the penalty imposed is beyond an amount that might be seen as an acceptable ‘cost of doing business’, especially for a company of Firstmac’s size and resources," she said.
Firstmac was also ordered to pay the costs borne by the Australian Securities & Investments Commission (ASIC) for the proceeding.
The importance of complying with DDOs
Commenting on the penalty, ASIC Chair Joe Longo said: “This is an important decision that acknowledges the risk of consumer harm caused by poor product design, distribution and marketing by Firstmac.
“We pursued this matter following concerns customers were exposed to the risk they might obtain financial products that were not appropriately suited to them. Compliance with the DDO is essential to protect customers.
“Today’s judgment should act as a deterrent to anyone engaged in cross-selling financial products who fails to consider their design and distribution obligations before sending product disclosure statements.”
Following the news, a spokesperson from Firstmac stated the lender was "currently reviewing the court’s decision".
They said: "We understand the importance of complying with Design and Distribution Obligations, and take our regulatory obligations seriously.
"The investment fund in question was not an integral part of our business. Since this matter occurred, we have liquidated the fund, repaid all customers and investors, and renewed our focus on lending, which is ultimately our core business.
"Whilst only a single investor in the fund lost $185, we have taken the opportunity to learn from this situation, and have made changes to uplift our already-robust governance framework, including increased allocation of compliance resources and enhanced staff training.
"We are committed to remaining a responsible lender to ensure that we know our customers and act in their best interests," the Firstmac spokesperson said.
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