Australia: New design and distribution obligations and product intervention powers for financial products

In brief - offerors (including insurers) and distributors of financial products will now be responsible for determining the target market for products and appropriate distribution strategies

The Government recently passed the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 (Bill).

In February 2018 we raised Treasury's revolutionary proposal for Design and Distribution Obligations and Product Intervention Powers in February 2018.

The proposal generated significant industry resistance as it involved the executive in the creation and distribution of new financial products, as opposed to policing issued products.

It seems that the aftereffects of the Royal Commission and associated pressure for financial services regulatory reform have created sufficient momentum to override legitimate industry concerns.

New powers for ASIC under the Treasury Laws Amendment Bill 2018

The Bill amends the Corporations Act 2001 (Cth) to introduce a design and distribution obligation for financial products and a product intervention power for the Australian Securities and Investments Commission (ASIC) to prevent or respond to significant consumer detriment for financial products and credit activities. The Bill also amends the National Consumer Credit Protection Act 2009 (Cth) to introduce a product intervention power for ASIC.

The new law represents a significant shift from the disclosure based regulatory framework for offers of financial products, and embeds a further compliance obligation in the financial advice framework.

When will it take effect?

Product intervention power - NOW

Design and distribution obligation - 6 April 2021

What are the key changes?

Product intervention power for ASIC is effective now. The new law significantly enhances ASIC's regulatory powers by providing for a range of orders prohibiting conduct in relation to financial products and credit products.

The scope of financial products which the obligation applies has two limitations to products:

• available or likely to be available to retail clients
• to be issued (as against sale arrangements)

The power can be used where ASIC is satisfied that a product or class of products has resulted, or is likely to result, in significant detriment to relevant persons. The term "significant" is not defined, although the law provides guidance on factors to be considered, such as the nature and extent of the detriment, the impact the detriment has had, will or is likely to have on consumers, and any matters prescribed under the Corporations Regulations.

For example, discussion papers have raised low loss ratios as evidence that an insurance product is not good value to consumers. This could be grounds for intervention in itself as value to consumers is a key policy focus. Such an approach reflects a dramatic change in how financial services regulation has been conceived in Australia in the period since the major reforms of the 1980s and 1990s.

To exercise its new intervention power, ASIC must also follow procedural fairness, consult with people likely to be affected by the order, and publish the order and issue a public notice in relation to the intervention. An order can last for up to 18 months, unless extended with the approval of the Minister.

In summary:

• ASIC can proactively intervene in relation to financial and credit products by making orders to prohibit specified conduct related to the product
• ASIC must consult affected parties before making the intervention orders and must make all orders public
• civil and criminal penalties apply for contraventions
• a person who suffers loss or damage because of a contravention may recover that loss by civil action. The person may also seek orders from a court which may make an order declaring the contract entered into void, or for the return of money and payment of interest. This could lead to some chaos and complexity as differing where courts may make differing determinations. The risk of class actions is obvious

Design and distribution obligation from 6 April 2021

The scope of financial products to which the obligation applies is a fundamental part of the new law, and is wider reaching than what industry might have expected.

The obligation applies to financial products that require a product disclosure statement (except for MySuper products and margin-lending facilities) and credit to a retail client, as well as some securities that require a disclosure document.

Fully-paid ordinary shares in a company or foreign company and securities issued under an employee share scheme are excluded from the obligation.

Effectively, the new law imposes a start to finish obligation for financial product issuers and distributors

This means issuers and distributors will need to carefully consider and determine the target market (which requires consideration of non-target markets) and appropriate distribution strategies for this. Financial services licensees will need to review risk and compliance arrangements to take into account the new law.

In summary:

• offerors will have to make a target market determination for most financial products that require disclosure and for financial products that are not regulated under the Corporations Act, but are regulated under the ASIC Act
• offerors will have to make target market determinations available to the public free of charge
• offerors will have to develop a plan for reviewing target market determinations and abide by that plan
• offerors will have to specify distribution information that distributors must collect, keep and provide back to the offeror
• distributors will be prohibited from distributing a product unless a current target market determination is in place
• offerors and distributors will have to take reasonable steps so that distribution is consistent with the most recent target market determination
• offerors and distributors will have to maintain records and information relating to their obligations under the new regime
• distributors will have to provide to offerors numbers of complaints about the product and distribution information relating to the product that offerors have specified
• distributors will have to notify a product's offeror, and an offeror must notify ASIC, of a significant dealing in a product that is not consistent with the product's target market determination
• ASIC will be given powers to enforce the new arrangements, including: the ability to request necessary information; issue stop orders; and, make necessary exemptions and modifications to the new arrangements
• civil and criminal penalties will apply for contraventions
• a person who suffers loss or damage because of a contravention of the design and distribution obligations may recover that loss by civil action

The new regime will also require advertising and promotional material to refer to the target market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.