The Treasury has released its proposals today.
“The measures outlined in this paper are aimed at improving accountability for financial products in our system throughout the whole product lifecycle. Importantly, product issuers will be required to target the distribution of their products to the consumers that are most likely to have their needs addressed by the product. In addition, ASIC will be empowered to take direct action to address problems where they identify the risk of significant consumer detriment”.
The proposals relating to product design and distribution obligations will apply to financial products made available to retail clients except ordinary shares. This would include insurance products, investment products, margin loans and derivatives. The obligations would not apply to credit products (other than margin loans). ‘Issuers’ and ‘distributors’ of financial products must comply with the obligations.
However, the product intervention power would apply to all financial products made available to retail clients (securities, insurance products, investment products and margin loans) and credit products regulated by the National Consumer Credit Protection Act 2009 (the Credit Act) (credit cards, mortgages and personal loans).
So combined they may have significant impact on the industry.
As part of the Government’s response to the Financial System Inquiry (FSI), Improving Australia’s Financial System 2015, the Government accepted the FSI’s recommendations to introduce:
- design and distribution obligations for financial products to ensure that products are targeted at the right people (FSI recommendation 21); and
- a temporary product intervention power for the Australian Securities and Investments Commission when there is a risk of significant consumer detriment (FSI recommendation 22).
This paper seeks feedback on the implementation of these measures. In order to assist interested parties in providing feedback, the Paper outlines proposals to illustrate how the measures could operate in practice. This approach recognises that many of the elements of the measures are interrelated and so to provide feedback people need to be able to view the measures holistically.
The proposals outlined in this paper are intended to elicit specific and focused feedback, and should not be viewed as a statement of the Government’s final policy position.
The Government invites all interested parties to make a submission on the proposals outlined in this paper. Closing date for submissions: Wednesday, 15 March 2017 . The responses received will inform the development of draft legislation which will be subject to public consultation.
Outlined below are the proposed positions on the nine key implementation issues for the measures.
Design and distribution obligations
Issue 1: What products will attract the design and distribution obligations?
Summary of proposal: The obligations will apply to financial products made available to retail clients except ordinary shares. This would include insurance products, investment products, margin loans and derivatives. The obligations would not apply to credit products (other than margin loans).
Issue 2: Who will be subject to the obligations?
Summary of proposal: ‘Issuers’ and ‘distributors’ of financial products must comply with the obligations. ‘Issuers’ are the entities responsible for the obligations under the product. Examples of issuers include insurance companies and fund managers.
‘Distributors’ are entities that either arrange for the issue of the product to a consumer or engage in conduct likely to influence a consumer to acquire a product for benefit from the issuer (for example, through advertising or making disclosure documents available). Distributors that provide personal advice will be excluded from the distributor obligations. Examples of a distributor include a credit provider that offers its customers consumer credit insurance or a fund manager that distributes its products using a general advice model.
Issue 3: What will be expected of issuers?
Summary of proposal: Issuers must: (i) identify appropriate target and non-target markets for their products; (ii) select distribution channels that are likely to result in products being marketed to the identified target market; and (iii) review arrangements with reasonable frequency to ensure arrangements continue to be appropriate.
Issue 4: What will be expected of distributors?
Summary of proposal: Distributors must: (i) put in place reasonable controls to ensure products are distributed in accordance with the issuer’s expectations; and (ii) comply with reasonable requests for information from the issuer related to the product review.
Product intervention power
Issue 5: What products will attract the product intervention power?
Summary of proposal: The power would apply to all financial products made available to retail clients (securities, insurance products, investment products and margin loans) and credit products regulated by the National Consumer Credit Protection Act 2009 (the Credit Act) (credit cards, mortgages and personal loans).
Issue 6: What types of interventions will the Australian Securities and Investment Commission (ASIC) be able to make using the power?
Summary of proposal: ASIC can make interventions in relation to the product (or product feature) or the types of consumers that can access the product or the circumstances in which consumers access it. Examples of possible interventions include imposing additional disclosure obligations, mandating warning statements, requiring amendments to advertising documents, restricting or banning the distribution of the product.
Issue 7: When will ASIC be able to make an intervention?
Summary of proposal: In order to use the power, ASIC must identify a risk of significant consumer detriment, undertake appropriate consultation and consider the use of alternative powers. ASIC must determine whether there is a significant consumer detriment by having regard to the potential scale of the detriment in the market, the potential impact on individual consumers and the class of consumers likely to be impacted.
Issue 8: What will be the duration and review arrangements for an ASIC intervention?
Summary of proposal: An intervention by ASIC can last for up to 18 months. During this time, the Government will consider whether the intervention should be permanent. The intervention will lapse after 18 months (if the Government has not made it permanent). ASIC interventions cannot be extended beyond 18 months. ASIC market wide interventions are subject to Parliamentary disallowance. ASIC individual interventions are subject to administrative review.
Issue 9: What oversight will apply to ASIC’s use of the power?
Summary of proposal: Interventions made by ASIC in relation to an individual product or how a specific entity is distributing a product will be subject to administrative and judicial review. Market-wide interventions subject to Parliamentary oversight including a 15-day Parliamentary disallowance period. The Government will review ASIC’s use of the power after it has been in operation for five years.
