Australia's corporate watchdog has launched legal action against Australian Unity Funds Management, claiming the company issued investment products to retail clients without properly checking if they were suitable candidates.

ASIC Takes Australian Unity to Court Over Investment Screening Failures

The Australian Securities and Investments Commission (ASIC) filed court papers in Melbourne's Federal Court on Tuesday, alleging Australian Unity violated design and distribution laws by failing to review investor questionnaires for nearly two years while continuing to sell interests in its Select Income Fund.

Court documents show ASIC is seeking financial penalties and public disclosure orders against the fund manager, which operates as part of the broader Australian Unity group that reported revenue of $2.17 billion in 2024.

The case centers on Australian Unity's handling of its Select Income Fund, a mortgage investment scheme that pools investor money into first mortgage loans. Between October 2021 and October 2023, the company was required to ensure new investors matched specific criteria outlined in target market determinations.

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Questionnaires Went Unreviewed for Years

According to ASIC's court filing, Australian Unity created questionnaires asking potential investors about their financial goals, risk tolerance, and investment timeframes. The surveys were designed to help determine whether applicants fit the fund's target market of income-seeking investors with medium to high risk profiles.

However, the regulator alleges the company failed to review these questionnaires from October 2021 until August 2023. During this period, at least 307 retail investors submitted applications to join the fund, with 220 completing questionnaires and up to 144 providing responses suggesting they fell outside the target market.

The court documents reveal that 87 investors were accepted into the fund without completing any questionnaire at all during the early months of the relevant period.

"The design and distribution obligations are there to help make sure consumers get appropriate financial products aligned with their objectives, financial situation and needs," said ASIC Deputy Chair Sarah Court. "Issuers do not meet these obligations just by issuing a questionnaire. They need to actively review investor responses."

Two weeks ago ASIC was also warning against significant compliance failures across the managed investment sector. The responsible entities have overseen nearly $1 trillion in assets that have failed to maintain adequate oversight plans.

Investors Face Significant Losses

The alleged screening failures exposed investors to substantial financial losses when some of the fund's underlying mortgage investments soured. Court documents detail three specific mortgage syndicates where investors lost money:

• The Studley Park Road syndicate saw 23 new investors contribute $1.75 million, only to lose approximately 35% of their capital when the underlying loan failed
• In the Cheng and Lok Company syndicate, 76 investors put in $8.67 million and are estimated to have lost 3.3% of their investment
• A third Glen Iris project involving 33 investors and $1.25 million has stopped making distributions entirely

The Select Income Fund operates by taking investor money and lending it out as first mortgages on property developments. Investors receive monthly interest payments during the loan term, with their principal returned when the borrower repays.

“Product issuers must take reasonable steps to ensure that investors are within the target market before they issue interests in a product,” Court added.

Australian Unity's wealth and capital markets division manages $18.7 billion in funds and generated $232.5 million in revenue last year, according to the court filing.

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Legal Action Seeks Penalties

ASIC is asking the Federal Court to declare that Australian Unity breached its legal obligations on 307 separate occasions by issuing fund interests without proper target market screening. The regulator wants financial penalties imposed and is seeking orders requiring the company to publicly disclose the contraventions.

The case highlights ongoing regulatory scrutiny of Australia's design and distribution obligations, which came into effect in October 2021 to prevent unsuitable financial products being sold to retail investors.

Australian Unity has been served with the court papers and must file a defense if it intends to contest the allegations.