In September 2018, new legislation was proposed in Australia aimed at improving consumer protection in relation to financial products and credit products. The proposed legislation is a response to the Financial System Inquiry (FSI), which in December 2014 suggested the introduction of design and distribution obligations and product intervention powers, which would be applicable to issuers of financial products and credit products.
The Bill has two objectives:
- To require issuers of financial products and credit products with disclosure obligations to ensure that certain products are targeted at the appropriate audience; and
- To provide ASIC (the Australian Securities & Investments Commission) product intervention powers for both financial products and credit products where there is a risk of significant consumer detriment.
The Bill would provide ASIC with discretionary powers to intervene in instances where issuers of financial products and credit products are not compliant. The new powers will allow ASIC to:
- Authorise the amendment of the way financial products and credit products are marketed;
- Require product issuers to update disclosure materials;
- Authorise the imposition of consumer cautions and changes to labels;
- Restrict the way a product is distributed; and
- Authorise the banning of certain products where ASIC considers them in contravention of the reforms.
Design and Distribution Obligations
The design and distribution obligations under the Bill would require all issuers of financial products and credit products to:
- Appropriately identify target markets in relation to their products, by taking into consideration the features of each product and the investors in the relevant markets;
- Select appropriate distribution channels; and
- Periodically review their distribution arrangements in order to ensure that they continue to be compliant.
The design and distribution obligations would apply to all financial products and credit products that are sold to retail consumers. However, there are financial products and credit products which would not be impacted by the obligations, which include ordinary shares, securities, margin lending products and any products regulated under the National Consumer Credit Protection Act (i.e. credit cards, mortgages etc.).
In addition, distributors of financial products and credit products will be required to adopt reasonable controls to ensure that products are being distributed in conjunction with the appropriate target markets and follow reasonable requests from ASIC for information in relation to the product.
Who will be affected?
Product Issuers will be affected as the new obligations will change the way in which disclosure documentation must be prepared. Issuers include, but are not limited to, asset managers, financial managers and insurers.
Product Distributors will be affected as they arrange for the issue of financial products and credit products and the onus lies upon the distributor to implement reasonable controls in order to ensure that product distribution is in accordance with the issuer and their anticipations. Product distributors are advised to consider adopting policies and procedures to ensure compliance. Product distributors include, but are not limited to, fund managers who distribute products whilst relying on a general advice model.
ASIC’s powers and civil action
Although ASIC’s product intervention powers are intended to strengthen consumer protection and create accountability, they will not come without a disturbance to the financial and credit markets.
Product intervention powers will act as a preventative measure empowering ASIC to intervene in product design or distribution and sales to prevent significant consumer detriment from occurring. However, product intervention powers are scaled quite low in the hierarchy of action to be taken by the regulator. Intervention should only occur in instances where all other measures have failed to achieve a timely removal of the risk of the consumer detriment and should therefore be infrequently relied upon.
What are the implications of these reforms?
Issuers of financial products and credit products will be obliged to conduct a review of their current policies and procedures in relation to the design, distribution and review of the financial products they offer. Issuers of financial products and credit products must also ensure that all staff are appropriately trained and monitored as well as ensure that there are operational controls and risk management systems in pace to comply with the obligations.
The scope of ASIC’s intervention powers toward issuers of financial products and credit products are quite broad and include:
- Banning a particular product in the market;
- Imposing additional product disclosure obligations;
- Imposing statements to warn consumers where ASIC deem necessary;
- Amending of any advertising and marketing material, which has the potential of misleading and/or deceiving consumers; and
- Imposing limitations as deemed necessary.
The overall objective of these reforms is to protect retail consumers from issuers of financial and credit products to ensure that consumers are not being misled into a particular product.
The Australian parliament does not resume until mid February 2019. However combined with the anticipated release of the final report into the Banking Royal Commission in early February 2019 and the Australian federal election before June 2019, it is not anticipated that this bill will pass both houses and come into force before the second half of 2019.
Melody Gao is a lawyer focusing on financial services and compliance at Sydney-based financial services consultancy firm Sophie Grace.