Since 6 April 2019, ASIC has had the power to proactively intervene in relation to a financial or credit product ("product") or class of products to reduce the risk of significant detriment to consumers.
In June 2020, ASIC issued Regulatory Guide 272 (RG 272) providing long awaited guidance to the approach ASIC will take when using its product intervention powers.
Products in relation to which ASIC may make an order
ASIC can intervene in relation to:
- financial products regulated under the Corporations Act 2001 (Corporations Act) - where the products are, or are likely to be, available for acquisition by issue, or for regulated sale to retail clients. Such products may include securities, interests in managed investment schemes, derivatives, insurance products, superannuation products and deposit-taking facilities;
- credit products regulated under the National Consumer Credit Protection Act 2009 (NCCP Act) - where a person is engaging, or is likely to engage, in credit activity in relation to a credit product (including a credit contract, mortgage, guarantee or consumer lease) or a proposed credit product; or
- financial products regulated under the Australian Securities and Investments Commission Act 2001 - where the products are, or are likely to be, available for acquisition by retail clients by way of issue. Such products may include certain types of short-term credit and buy-now-pay-later arrangements.
However, before intervening, ASIC must be satisfied that the product or class of products has resulted, will result, or is likely to result in significant detriment to consumers.
Understanding significant detriment
There is no legislative definition of 'significant' associated with ASIC's product intervention powers. However, some guidance can be obtained from the Revised Explanatory Memorandum to the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019 (Revised Explanatory Memorandum).
The Revised Explanatory Memorandum provides that:
- the term 'significant' should be given its ordinary meaning; and
- detriment will be 'significant' where the detriment is "sufficiently great to justify an intervention, having regard to the circumstances of the case and the object of the intervention power".
In RG 272, ASIC says that it will interpret detriment to include both financial and non-financial harm or damage and will arise where a person is sold a product that is "misaligned with their needs, understanding or expectations".
Factors ASIC must take into account when assessing significant detriment
ASIC must take into account a number of factors when considering whether a product or class of products has resulted in, or will, or is likely to result in, significant detriment. These include:
- the nature and extent of the detriment;
- the actual or potential financial loss to consumers from the product;
- the impact that the detriment has had, or will or is likely to have on consumers;
- any matters prescribed by regulations.
While ASIC must consider the matters listed above, it is not limited by these matters.
In this regard, ASIC has indicated in RG 272, that it will also consider whether detriment has already occurred, the causes of that detriment and other factors that make detriment more likely including:
- the complexity or opaqueness of the product and the circumstances of its sale;
- evidence or risk of consumer confusion or misunderstanding;
- the extent and operation of any conflicts of interest;
- how choices and processes are presented to retail clients/consumers that influence their decision to acquire and use the product;
- other obstacles that retail clients/consumers face in using the product that are likely to lead to significant detriment; and
- products, conduct or methods of distribution of a sufficiently similar nature that have previously resulted in significant consumer detriment.
The types of orders ASIC can make
ASIC can make two types of product intervention orders:
- an individual order that applies to a specific person(s) in relation to a product; or
- a market-wide order that is applicable to a person in relation to a class of products.
Market-wide orders will be made by way of a legislative instrument and are more likely to be used where ASIC wants to address either widespread industry conduct or where ASIC is concerned that the conduct may be adopted by others or 'pheonixed'.
While individual orders will be reviewable by the Administrative Appeals Tribunal, market-wide product intervention orders are not.
A person may also have the right to seek a judicial review of a decision made by ASIC.
ASIC may order that a person not engage in specific conduct in relation to a product or class of such product, either entirely or except in accordance with certain conditions.
In RG 272, ASIC gives examples of the types of interventions it may make, including, but not limited to an order:
- that a product or class of products only be offered by way of issue to specific classes of consumers;
- that a product or class of products not be distributed without prescribed improvements to the information provided to consumers;
- banning the feature of a product or class of products;
- that a feature of a product or class of products not be available unless it complies with specific criteria; and
- banning the issue of a product or class of products.
ASIC may also use its intervention powers to require a person to take reasonable steps to notify existing consumers about the terms of a product intervention order where that person has:
- dealt in a financial product in relation to the retail client;
- provided financial advice to the consumer in relation to a financial product; or
- engaged in credit activity in relation to a credit product in respect of the consumer.
Conditions that cannot be imposed by a product intervention order
There are certain limitations on the type of product intervention orders that ASIC can make.
A product intervention order cannot:
- require a person to meet a standard of training or a professional standard (other than a standard to which that person is subject to under the Corporations Act or NCCP Act);
- require a person who is not required to hold an AFSL or ACL to become a member of an external dispute resolution scheme (i.e. the Australian Financial Complaints Authority); or
- impose requirements in relation to a person's remuneration, other than a condition related to so much of the person's remuneration as is conditional on the achievement of objectives directly related to the product.
ASIC's product intervention order powers are not retrospective. Further, ASIC cannot make retrospective orders. That is, ASIC can only make a product intervention order in relation to products issued or sold to consumers after the date of the order.
Before ASIC makes a product intervention order, it must first:
- consult with persons who are reasonably likely to be affected by the proposed order;
- consult with APRA if the proposed order will apply to a body regulated by APRA; and
- comply with any other requirements as to consultation prescribed by the regulations.
ASIC will be deemed to have consulted with persons who are reasonably likely to be affected by a proposed product intervention order where ASIC has made the proposed product intervention order (or a description of the content of the proposed order) available on its website and invited public comment on the proposed order.
While ASIC is required to consult before making an order, a failure to consult will not invalidate a product intervention order.
Commencement of product intervention orders
A product intervention may specify a commencement date. If, however, no commencement date is specified in the order itself, then:
- if made by legislative instrument (a market-wide order), the order will commence on the day after the legislative instrument is registered under the Legislation Act 2003 (Cth); or
- in all other cases, the order will commence on the day after notice of the order is published on ASIC's website.
Duration of a product intervention order
A product intervention order will generally remain in force for a period of 18 months unless a shorter period is specified in the regulations or in the order itself.
A product intervention order can be extended with the approval of the Minister (having considered a report prepared by ASIC) prior to the order ceasing to be in force.
Further, in certain circumstances, ASIC may amend or revoke a product intervention order that is in force or remake an order.
Publishing product intervention orders
ASIC must publish a copy of each product intervention order on its website together with a notice that:
- describes the significant detriment to consumers that has resulted from, or will or is likely to result from, the product or class of financial products to which the order relates,
- sets out why the order is an appropriate way of reducing that detriment;
- describes the consultation that ASIC undertook in relation to the order; and
- if the order comes into force after it is published, specify the day it comes into force.
ASIC must also publish a copy of any amendment to a product intervention order and notice of any extension or revocations on its website.
Enforcing a product intervention order
ASIC may take enforcement action through civil penalty proceedings or criminal prosecution where a person breaches a product intervention order or any related obligation.
How ASIC has sought to use its product intervention powers
Since 6 April 2019, ASIC has released the following consultation papers:
- CP 316: using the product intervention power: short term credit;
- CP 322: product intervention: OTC binary options and CFDs;
- CP 324: product intervention: the sale of add-on financial products through caryard intermediaries; and
- CP 330: using the product intervention power: continuing credit contracts
To date, ASIC has only made two product intervention orders by way of legislative instrument.
This first order (ASIC Corporations (Product Intervention Order - Short Term Credit) Instrument 2019/917) effectively bans a model of short term lending that requires consumers to pay fees to the credit provider and associates of the credit provider in relation to short term credit which, when combined, exceed the prescribed limits for regulated credit. This order commenced on 14 September 2019 and will remain in force for 18 months.
The second order (ASIC Corporations (Product Intervention Order - Contracts for Difference) Instrument 2020/986) relates to the issue, dealing, arranging and distribution of CFDs to retail clients. The order commenced on 23 November 2020, but the various conditions and prohibitions set out in the order will not apply until 29 March 2021. The order will restrict CFD leverage for retail clients to maximum ratios depending on the type of instrument, standardise margin close-out arrangements, protect against negative account balances and prohibit certain inducements to retail clients. Pursuant to the order, CFD issuers are required to notify retail clients (to whom they have issued a CFD in the 12 month period before the order commenced) of the terms of the order no later than 7 December 2020.
Given that ASIC will generally consult on any proposed product intervention orders via its website, it is a good idea to regularly keep your eye on ASIC's media releases.
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.