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ASIC welcomes the Government’s commitment to creating new design and distribution obligations in relation to financial products and strengthening consumer protection by introducing a product intervention power

The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 has now been through its second reading debate on 24 October 2018 in the House of Representatives.

The purpose of the Bill is to overcome gaps in the current regulatory regime and promote the provision of suitable financial products to consumers. The Bill will provide ASIC with enhanced abilities to enforce issuers and distributers to appropriately market and distribute financial products targeted at retail clients.

The new design and distribution obligations and product intervention power will generally apply to offers of financial products that require acknowledgement of the Corporations Act 2001 (Cth) (“Corporations Act”) or are exempt from disclosure. This includes financial products requiring a PDS under the Corporations Act, disclosure to investors and those products which are exempt.

The Bill is intended to reflect the recommendations made from the Financial System Inquiry (“FSI”) in 2014. The FSI noted that the existing framework which relies heavily on disclosure financial advice and financial literacy is ineffective due to several reasons including complexity, low financial literacy and misaligned interests. The FSI considered how to reduce the number of consumers acquiring financial products that were not suitable. The FSI recommended that the government take a number of actions, including making issuers and distributors more accountable for the design and distribution of products and introducing a product intervention power. The intention of these recommendations is to also allow ASIC to intervene instead of waiting for a breach of regulation to occur.

 

Design obligations

The design obligations will be placed onto the offeror or issuer who is responsible for developing the product and disclosure documents. The following points lists the  design obligations for retail financial product offerings:

  • make a target market determination in relation to the product;
  • describe key features and investment objectives of the product;
  • describe circumstances of the persons involved in the market;
  • review target market and ensure it remains appropriate under applicable events and circumstances;
  • keep certain records of all decisions in relation to the new regime; and
  • notify ASIC of significant dealings.

 

Distribution obligations

The distribution obligations will be placed onto distributors who are responsible for making offers, providing advice or disclosure documentation for a retail product. The following points list the distribution obligations for retail financial product offering:

  • Not to deal or provide financial product advice unless a target market determination has been made or may no longer be appropriate;
  • To take reasonable steps to ensure that products are distributed in accordance with the target market determination;
  • To collect and provide information related to the distribution of a product; and
  • To notify ASIC of significant dealings.

 

Product intervention powers

The Bill will strengthen ASIC’s powers to allow it to regulate and even cease potentially inappropriate financial and credit products.

The limitations on conduct relating to the product could potentially include:

  • Banning the offering of a product or a particular class of product to consumers;
  • Directing product that can only be offered to particular classes of consumers, or in certain circumstances; or
  • 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 has or is likely to result in significant detriment to relevant persons (i.e., retail clients). Importantly, a product may be determined to cause detriment even if it complies with all applicable laws, including applicable disclosure, design and distribution obligations.

 

More information can be read on the Submission by the Australian Securities and Investments Commission: Design and distribution obligations and product intervention power: Revised exposure draft legislation.