Australia: The Future Of Consumer Protection In Australia: New Product Design And Distribution Laws On The Way

Last Updated: 8 October 2018
Article by Avryl Lattin and Yvonne Lam

On 20 September 2018, the Australian Government introduced the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 (Product Design and Distribution Bill) into Federal Parliament. The draft legislation will impose greater responsibility for product design and appropriate distribution on the issuers and distributors of financial products. The Australian Securities and Investments Commission (ASIC) will also be given significant intervention powers to regulate or ban potentially harmful financial and credit products where there is a risk of significant consumer detriment.

Background

In 2015, the Financial System Inquiry (FSI) highlighted several shortcomings associated with the existing consumer disclosure regime for financial products under the Corporations Act 2001 (Cth) (Corporations Act). Consequently, the FSI made recommendations to the Australian Government calling for the creation of new design and distribution obligations for entities that issue or distribute financial products to ensure that products are targeted at the right consumers and to strengthen consumer protection by introducing financial product intervention powers.

These two FSI recommendations were accepted by the Australian Government and in December 2016, the Australian Treasury issued a proposals paper, allowing submissions from interested parties on the implementation of the proposed measures. Subsequently, there were two rounds of exposure draft legislation released (in December 2017 and July 2018) and stakeholders were also invited to provide feedback on the exposure drafts.

Proposed amendments to the Corporations Act 2001 (Cth) and National Consumer Credit Protection Act 2009 (Cth)

It is proposed in the Product Design and Distribution Bill that the Corporations Act will be amended to insert a new Part 7.8A – Design and distribution requirements relating to financial products for retail clients and a new Part 7.9A – Product intervention orders.

The National Consumer Credit Protection Act 2009 (Cth) (the Credit Act) will also be amended to introduce a new product intervention power for ASIC to prevent or respond to significant consumer detriment for credit contracts.

Proposed product design and distribution obligations

Under the Product Design and Distribution Bill, the proposed Part 7.8A of the Corporations Act will impose design and distribution obligations on "regulated persons" for certain products which have disclosure requirements under the existing Corporations Act (generally products which are offered to retail clients).

The amendments are aimed at ensuring that financial products are targeted at an appropriate audience. Products which are exempt from the new proposed regime include margin lending facilities, securities to which an employee share scheme applies, fully-paid ordinary shares and MySuper superannuation products.

Regulated Persons

For the purposes of the new Part 7.8A of the Corporations Act, the term "regulated persons" is defined by reference to the existing definition in section 1011B of the Corporations Act to include:

  • the issuer of a financial product;
  • any person required to hold a financial services licence (or who is exempt from holding such a licence by a specified provision);
  • any authorised representative of such a licensee;
  • sellers of financial products where the sale requires a disclosure document or Product Disclosure Statement (PDS).

The Product Design and Distribution Bill also extends to an issuer of securities and sellers of financial products for secondary sales that require a disclosure document or a PDS, as well as offerors of financial products within the meaning of Chapter 8 of the Corporations Act (being foreign offerors of financial products).

It is acknowledged in the Explanatory Memorandum to the Product Design and Distribution Bill that the issuer of a financial product may also be a distributor of the product in some circumstances.

Product Design Obligations on Issuers

Under the proposed legislation, the person who is responsible for preparing the disclosure document for the product (i.e. the product issuer) will now be required to:

  • make a "target market determination" for a product;
  • keep the target market determinations under review;
  • keep records about decisions regarding target market determinations; and
  • notify ASIC of significant dealings inconsistent with target market determination.

Target Market Determinations

There are various requirements that will have to be met to make a target market determination. For example, the determination must be in writing, must describe the class of retail clients that comprises the target market for the product, must specify conditions and restrictions on retail product distribution conduct in relation to the product, and must specify the period for review of the determination.

There is also a requirement that product issuers make target market determinations available to the public free of charge.

Distribution Obligations on Product Distributors

New distribution obligations will also be imposed on the person responsible for making offers, or giving advice or disclosure documents to potential investors (i.e. product distributors).

A product distributor will be prohibited from engaging in retail product distribution conduct unless a target market determination has been made, or engaging in retail product distribution conduct where a target market determination may no longer be appropriate.

In addition, the product distributor will be under an obligation to:

  • take reasonable steps to ensure that retail product distribution conduct is consistent with the target market determination;
  • collect and provide information specified by the product issuer and complaints related to the distribution of a product; and
  • notify the product issuer of significant dealings inconsistent with the target market determination.

Proposed Penalties

Contravention of the obligation under the proposed regime will include both civil penalties and criminal offences. There will be maximum criminal penalties of up to 200 penalty units ($42,000) or imprisonment for 5 years or both, or maximum civil penalties of $200,000 for an individual or $1 million for a body corporate.

In addition, it is proposed that a person who suffers loss or damage because of contravention of the obligations under the Product Design and Distribution Bill may be able to recover that loss by civil action.

New Product Intervention Powers for ASIC

The proposed new product intervention powers under the Product Design and Distribution Bill will permit ASIC to proactively intervene to reduce harm to consumers before a breach occurs, through regulating or banning potentially harmful financial and credit products where there is a risk of significant detriment to retail clients.

Factors which will be relevant to ASIC's determination as to whether consumer detriment is "significant" for the purposes of this new power include: the nature and extent of the detriment (including any actual or potential financial loss to retail clients), and the impact of the detriment on retail clients.

It is proposed that ASIC will gain the ability to make a range of orders prohibiting specified conduct in relation to products regulated under the Corporations Act (generally financial products available to retail clients) and the Credit Act. An intervention order made by ASIC will initially remain in force for up to 18 months, but in certain circumstances the time period for the order may be extended. All product intervention orders will be published on ASIC's website.

ASIC will be required to satisfy consultation and notification obligations before an intervention order is made, and affected parties will be given the opportunity to make submissions to ASIC before an intervention is made, with all interventions to be made public. In addition, APRA will be consulted where the proposed order will apply to a party regulated by APRA.

ASIC will only be able to intervene in relation to products that are made available for acquisition after the commencement of the new power. ASIC will not be able to make orders in respect of products that have already been acquired or in circumstances where a contract for the acquisition of the product has already been entered into.

The Australian Government has also flagged that it is proposing to make regulations to expand the application of the regime to the following products which are not currently regulated under Chapter 7 of the Corporations Act to create intervention powers for ASIC:

  • Funeral expenses insurance;
  • Certain extended warranties that are functionally equivalent to add-on insurance; and
  • Short-term credit that is currently not regulated under the Credit Act.

Expected timing for implementation of the legislation

The Product Design and Distribution Bill has been referred to the Senate Economics Legislation Committee which is required to report by 9 November 2018.

Assuming that the Product Design and Distribution Bill is passed in its current form, there will be a transitional period of 2 years after the legislation receives Royal Assent, before the product design and distribution obligations take effect.

During the transitional period, financial product issuers and distributors will have to review their current product design, distribution frameworks and product target markets in light of the proposed obligations. There are no grandfathering provisions for existing products so this means that consideration of the appropriate target market will also be required for products that are already on the market.

Existing product disclosure obligations will continue in force so insurers and insurance distributors will need to comply with multiple sets of consumer protection obligations in dealing with retail insurance products going forward.

Under the proposed legislation, ASIC's product intervention power will apply from the day after the Product Design and Distribution Bill receives Royal Assent (but it will not be retrospective in nature). Accordingly, from this date (even though it will not yet be compulsory to undertake a target market determination), where a product is determined by ASIC to cause significant detriment to consumers, ASIC will be able to issue a stop order and take other action that it considers appropriate.

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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Yvonne Lam
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