New design and distribution obligations and product intervention powers on the horizon

What is it?

The Government is seeking to introduce the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Power) Bill 2018 (Cth) (“Bill”) into law.

The new regime’s purpose is to promote the provision of suitable financial products to consumers by requiring issuers and distributers to appropriately market and distribute financial products aimed at retail clients. It will also provide ASIC with enhanced powers to facilitate this.

The obligations will generally apply to offers of financial products that require disclosure under the Corporations Act 2001 (Cth) (“Corporations Act”) or are exempt from disclosure. This will include financial products requiring a PDS under the Corporations Act, disclosure to investors under Part 6D and those products which are exempt.

There are separate concepts contained within the Bill, being the distribution and design obligations and the product intervention powers.

Why is the Bill being introduced?

In 2014, the Financial System Inquiry (“FSI”) considered the question of how to reduce the number of consumers buying financial products that were not suitable to their needs, because of complexity or risk or time frames. The FSI noted that the existing framework relies heavily on disclosure, financial advice and financial literacy but that disclosure can be ineffective for a number of reasons, including consumer disengagement, complexity of documents and products, behavioural biases, misaligned interests and low financial literacy.

The FSI suggested that it was unsatisfactory that ASIC could only wait for a breach of a regulation to occur before it could intervene, and recommended that the government take several actions, including making issuers and distributors more accountable for design and distribution of products and introducing a product intervention power. The Bill is intended to reflect these recommendations.

What are the design obligations?

Design obligations are imposed on the person (known as the offeror or issuer) who is responsible for developing the product and disclosure documents. Their obligations are as follows.

1. To make a target market determination

At the beginning of the design stage, the new regime will require offerors to identify and determine the product’s target market. This must, among other things, describe the class of intended retail clients that comprise the target market for the product and specify any conditions and restrictions on retail product distribution conduct. All advertising and promotional material for a financial product must refer to the product’s target market.

2. To review the target market determination

The Bill requires offerors to regularly review the target market determination to ensure that it remains appropriate. Offerors must identify what events and circumstances (“review triggers”) may suggest that the determination is no longer appropriate. These will depend on the nature of the product and the circumstances surrounding its issue, but generally, offerors must consider circumstances which could materially change a factor previously considered, whether the product is actually being availed of by the purported target consumers and any feedback received.

3. To keep certain records

The offeror is required to retain details of all decisions regarding a target market determination, review triggers, review periods and other decisions relating to the determination..

4. To notify ASIC of significant dealings

The offeror will be obliged to notify ASIC of any significant dealings in relation to a product which are inconsistent with its target market determination. Although “significant” has not been defined in the Bill, its Explanatory Memorandum provides that it is intended to take its ordinary meaning in the context of the new provision. Generally, this would mean dealings that are worthy of ASIC’s attention having regard to the new regime’s consumer protection objective and the offeror’s role as the product’s designer. However, ultimately this will be determined in the circumstances of each case.

What are the distribution obligations?

The new distribution obligations will apply to a person that engages in “retail product distribution conduct”. These people (distributors), are responsible for making offers, providing advice or disclosure documentation to potential investors. A person will be considered to be engaging in retail product distribution conduct if they:

1.      Issue or arrange to issue a financial product;

2.      Provide financial product advice;

3.      Give a PDS or other disclosure documents; or

4.      Make a recognised offer.

The distributor’s obligations are as follows:

1.      Not to engage in retail product distribution unless a target market distribution has been made;

2.      Not to engage in retail product distribution if the determination may not be appropriate;

3.      To take reasonable steps to ensure that the distribution is consistent with the market determination

“Reasonable steps” in this context encompasses a risk management approach which requires the distributor to consider relevant risk factors, including the likelihood of their dealings or advice resulting in a class of consumers outside the target market acquiring the product, the nature and degree of harm which could result from the incorrect consumer target market acquiring the product, and how the likelihood should be mitigated.

4.      To collect and provide information specified by the issuer and complaints related to the distribution of a product; and

5.      To notify ASIC of significant dealings.

What are the product intervention powers?

The Bill strengthens ASIC’s powers so as to allow it to regulate and (if necessary, ban) potentially harmful financial and credit products.

Currently ASIC regulates these types of concerns by way of stop orders and/or corrective disclosure. Under the new regime, ASIC will be able to make an intervention order, which can last for up to 18 months (but this can be extended). Effectively, it gives ASIC the power to intervene to pre-empt detriment to retail clients.

This order will specify limitations on conduct relating to the product. For example, this could potentially include:

1.      Banning the offering of a product or a particular class of product to consumers;

2.      Directing that a particular product or class of product can only be offered to particular classes of consumers, or in certain circumstances; or

3.      Directing that a product or class of product cannot be distributed to consumers without an appropriate warning.

ASIC will be able to utilise its product intervention powers where it is satisfied a product (or class of product) has or is likely to result in significant detriment to relevant persons (i.e., retail clients and credit consumers). Importantly, a product may be determined to cause detriment even if it complies with all applicable laws, including applicable disclosure, design and distribution obligations.

Next steps?

We have been following the progress of the Bill through parliament and will continue to do so, as we report on legislative updates and releases as they occur to keep you informed of developments.

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