ASIC’s New Product Intervention Powers

The 2015 Financial System Inquiry led to the introduction of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019, which received royal assent and became law on 5 April 2019.

ASIC has welcomed the new laws which grant ASIC the power to intervene to ensure that financial products are designed and marketed appropriately.

ASIC’s lack of intervention was a concern highlighted in the recent Banking Royal Commission so, although these amendments predate the Royal Commission, it is nevertheless a step forward to recognising the role that ASIC should play as the financial services watchdog.

Outline of the amendments

The amendments apply to the Corporations Act 2001 (Cth) and the National Consumer Credit Protection Act 2009 (Cth) to introduce:

1. Product design and distribution obligations in relation to regulated products;
2. An intervention power by ASIC to prevent and respond to consumer detriment resulting from inappropriate design or marketing of regulated products.

The regulated products generally comprise financial products and credit products, including offers of securities, that require disclosure under the Corporations Act 2001 (Cth) and the Credit Code, but the legislation also extends to financial products regulated by the Australian Securities and Investments Commission Act 2009 (Cth) including funeral expenses policies, extended warranties and ‘buy now pay later’ arrangements.

There are some exemptions and these include:

1. MySuper products;
2. margin lending facilities;
3. employee share schemes; and
4. offers of ordinary shares in corporations unless intended to be converted into a preference share or for the purpose of funding an investment scheme.

The design and distribution obligations will take effect from 6 April 2021 and they effectively provide for:

1. an obligation for issuers of regulated products to make a target market determination (TMD) which is to be publicly available and outline, among other things, the class of retail clients the product is targeted at, any conditions and restrictions on product distribution conduct to be adopted, and any events or circumstances that might suggest a change in determination to be made; and
2. an obligation to take reasonable steps to ensure distribution of the product is consistent with the TMD.

Notwithstanding delay to the commencement of the TMR obligations, ASIC’s intervention power to curtail any detriment to consumers resulting from the inappropriate distribution of regulated products commences immediately.

What does it mean for financial services licensees?

For financial services licensees, the new design and distribution obligations adequately mean publicly disclosing how they categorise and market regulated products, which in some cases will require a review of those policies.  The licensees are then obligated to take reasonable steps to ensure the products are marketed accordingly.

There are some questionable elements, such as:

1. whether detailed customer considerations or the text of the TMD may then amount to providing personal financial advice;
2. the extent of products to which these new obligations apply, which is still very broad and may be impractical for specific products; and
3. the steps which an issuer is be expected to take if there is an inconsistency between the actual uptake of the product as opposed to whom it is designed for, which is a little unclear.

In the lead up to the commencement of the TMD obligations, and in effect as soon as possible given ASIC’s intervention powers begin immediately, issuers of regulated products should start to formalising their policy considerations. This includes assessing how their products are presently being utilised by consumers, any detriment potentially caused, and any changes or additional factors that should be implemented.

How ASIC proposes to go about its new powers

ASIC hasn’t yet issued a guidance statement on its interpretation of the new design and distribution obligations

It is worth noting that overseas regulators awarded similar powers have, in some cases, used these powers to ban products, such as overly complicated products, or impose limits on certain products.  We will have to see how ASIC responds and to what degree, in the use of its new powers.

As stated above, in its response to the draft legislation, ASIC made clear that it wanted the new laws to extend to products regulated under the ASIC Act, which ASIC identified as a cause for consumer detriment, and ASIC has previously taken aim at providers of buy-now-pay-later services, a product it will no doubt continue to scrutinise.

If you’re seeking legal advice or further information on ASIC’s new powers, please contact us today.

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