Australia: Government proposes Design Distribution Obligation and Product Intervention Powers legislation following financial system inquiry

IN BRIEF: IF THE DRAFT LEGISLATION BECOMES LAW IT WILL GIVE ASIC SIGNIFICANT NEW REGULATORY POWERS

In late 2016, Treasury issued a discussion paper in respect of a proposed Design Distribution Obligation and Product Intervention Power. This formed part of the Government's response to the 2015 Financial System Inquiry, Improving Australia's Financial System.

The proposed Design Distribution Obligations and Product Intervention Powers legislation is currently at exposure draft stage. We have every expectation that the legislation will substantively become law.

ASIC'S REGULATORY POWERS UNDER THE PROPOSED DESIGN DISTRIBUTION OBLIGATIONS AND PRODUCT INTERVENTION POWERS LEGISLATION

In very brief summary, the new regime would introduce the following:

  • if a Product Disclosure Statement (PDS) is required for a product, then the responsible person must make a target market determination (TMD) for the product before a person deals in the product or provides financial product advice in relation to the product;
  • it is prohibited to deal in a financial product or provide financial product advice unless a TMD is made;
  • a TMD must be in writing;
  • a TMD for a financial product must:
  • describe the class of persons who comprise the target market for the product; and
  • set out any conditions and the restrictions on dealings in, or providing financial product advice in relation to, the product;
  • a TMD for a financial product must be such that it would be reasonable to conclude that, if the product were issued or sold to persons in the target market in accordance with its distribution conditions, the product would generally meet the likely objectives, financial situations and needs of the persons in the target market;
  • the TMD must be reviewed, if the person responsible knows or ought reasonably to know that an event or circumstance has occurred that would reasonably suggest that the TMD is no longer appropriate (a review trigger);
  • within 10 business days or as soon as practicable (whichever is shorter) of the requirement for review, the issuer must take reasonable steps to ensure that a regulated person who deals in the financial product or provides financial product advice in relation to the financial product is given a direction not to distribute a PDS or deal in the product until a new determination is made; and
  • a responsible person must take reasonable steps to ensure TMDs be given effect.

The draft legislation includes the usual record keeping and notification obligations, as well as various penalties that can be applied.

ASIC has the power to issue a stop order if it is satisfied that there has been a contravention.

Similarly, a client may recover loss or damage if damage is suffered and the issuer is required not to deal in the product nor to provide financial advice in relation to the product.

The court also has the power to make an order declaring void a contract entered into by a client who has suffered loss or damage relating to a financial product, and such other orders as the Court sees fit.

A TMD cannot simply be a marketing pitch, and certainly not one stressing the assumed profits that a product might gather. Issues that have enlivened regulator concern include single figure loss ratios and exclusions that render a product useless to the target market.

We assume that product issuers will already be engaging in detailed assessment at product development stage. Issuers will also need to review products retrospectively. They will also need to monitor sales and claims, and set regular review dates.

Distribution and authorised representative arrangements should be reviewed urgently.

THE INTRODUCTION OF THE PRODUCT INTERVENTION POWER WILL BE A DRAMATIC CHANGE IN THE REGULATORY LANDSCAPE

ASIC may make a Product Intervention Order (PIO) if it is satisfied that a product is likely to be available for acquisition and has resulted in, or is likely to result in significant detriment to clients. ASIC has the power to order a person not to engage in specified conduct in relation to the product.

An example provided in the draft legislation is an order that the product not be issued to a retail client unless the retail client has received personal advice.

However, there is nothing in the legislation conceptually preventing a wider application of the PIP power, including, for example an order that an issuer not rely upon an exclusion in an insurance product, for example.

It is apparent that there could be significant ramifications for product issuers. ASIC's powers previously could only effectively operate at a licence condition or individual level. The PIO will be a significant new part of ASIC's powers.

ASIC will be obliged to consult before making a PIO and presumably will have to afford a degree of natural justice to an issuer.

A PIO will expire at the end of 18 months or a shorter period if specified in the regulations or if specified in the determination. The Minister may, after considering a report by ASIC, declare by legislative instrument that a PIO remain in force until revoked.

The draft also provides for civil liability in respect of any retail client who has suffered loss as a result of a failure to comply with a PIO, and the Court may also make orders declaring the contract void or such other orders as it sees fit.

The draft also provides for PIOs in respect of credit products.

All issuers will need to be alert to this new power, which strengthens the observation that consumer financial products are becoming more commoditised, and profits will be most likely made via distribution efficiencies.

Issuers will also need to review their pricing models, and (for insurers) their reinsurance arrangements.

Toby Blyth
Regulatory and financial services
Colin Biggers & Paisley

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.

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