The government has released an Exposure Draft of Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2017 for consultation. The draft Bill is intended to implement two of the recommendations of the 2015 Financial System Inquiry (Murray Inquiry/FSI) to introduce:
- new design and distribution obligations for financial products issuers to ensure that products are targeted at the right people (FSI recommendation 21); and
- provide ASIC with a temporary product intervention power when there is a risk of significant consumer detriment (FSI recommendation 22).
Minister for Revenue and Financial Services, Kelly O'Dwyer stated that the new measures will 'ensure that financial products are targeted and sold to the right consumers, and where products are inappropriately targeted or sold, ASIC will be empowered to intervene in the distribution of the product to prevent harm to consumers'. The consultation will close on 9 February 2018.
Financial product design and distribution obligations
According to the draft Explanatory Memorandum, the object of the proposed new design and distribution regime is 'to promote the provision of suitable financial products to consumers of those products. In particular, the new regime assists consumers to understand and select suitable financial products by requiring issuers and distributors to appropriately market and distribute financial products to consumers'.
The Design and Distribution Obligations will require issuers of financial products to:
- make a 'target market determination' ie identify target markets for their products, having regard to the features of products and consumers in those markets;
- select appropriate distribution channels; and
- periodically review arrangements to ensure they continue to be appropriate.
In addition, distributors of financial products will be required to:
- put in place reasonable controls to ensure products are distributed in accordance with the identified target markets; and
- comply with reasonable requests for information from the issuer in relation to the product's review.
In addition, the new law amends existing section 1018A of the Corporations Act to require advertising or other promotional material for a financial product to refer to the product's target market.
Application
The Design and Distribution obligations will generally apply to financial products that are sold to retail clients which currently require a product disclosure statement (PDS) with some exceptions. Exceptions include: Except MySuper products, margin lending facilities, securities to which an employee share scheme applies and ordinary shares. ASIC will also have the power to exempt a product, or a class of products, on a case by case basis.
New Product Intervention Power for ASIC
The draft Bill also proposes to give ASIC powers to support its regulatory role with respect to the new obligations outlined above. In particular, the proposed new Product Intervention Power will enable ASIC to intervene in the distribution of a product where it perceives a risk of significant consumer detriment. Proposed actions ASIC could take include the power to:
- request information relevant to its regulatory role;
- issue stop orders in relation to suspected contraventions of the new regime,
- require the amendment of product marketing and disclosure materials;
- impose consumer warnings and labelling changes;
- restrict how a product is distributed or banning products; and
- make exemptions and modifications to the new regime.
ASIC will also be empowered to ban aspects of remuneration practices, where there is a direct link between remuneration and distribution of the product. Before using this new power, ASIC will be required to consider a range of relevant factors, to consult prior to making an intervention, and to publicly release a statement of reasons for any intervention.
Intervention power is temporary
ASIC will be able to make an intervention for a period of up to 18 months. During this time, the Government will consider whether the intervention should be made permanent.
Consequences of breaching the new provisions
A contravention of every obligation in the new regime is proposed to be both a civil penalty provision and an offence to enable ASIC or the prosecutor (as the case may be) to take a proportional approach to the enforcement of the new regime. Civil and criminal penalties will apply to contraventions up to 200 penalty units and/or 5 years jail.
Proposed implementation date
The proposed design and distribution regime will apply to financial products where the first issuance commences 12 months after the Bill receives the Royal Assent. For existing financial products at that time, the new regime will apply 24 months after the Bill receives the Royal Assent. The ASIC intervention power will apply the day after Royal Assent.
