Following consultation, The Australian Securities and Investments Commission (ASIC) has released guidance – RG 272 Product Intervention Power – on how it will exercise the product intervention power introduced by the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019.The guidance sets out the scope of the product intervention power, how ASIC will use it and how an intervention order will be made.

In addition, ASIC has released a report - REP 661 Response to submissions on CP 313 Product intervention power - outlining the key issues raised in the consultation on the draft guidance and its response to those issues.

A 'timely' addition to ASIC's regulatory toolkit

Announcing the release of the final guidance, ASIC Deputy Chair Karen Chester described the product intervention power as an 'incredibly important addition to ASIC’s regulatory toolkit' that will allow the regulator to be proactive in its approach to 'confront[ing], and respond[ing] to, harms in the financial sector in a targeted and timely way'. This she said, is particularly 'timely' in light of the COVID-19 pandemic and its impacts on consumers. In addition, Ms Chester suggested that over time, the 'targeted solving of problems through product interventionmay result in less regulation of industry overall' by limiting/avoiding the need for more regulation.

Context: What is the product intervention power? 

The product intervention power (PIP) enables ASIC to take a proactive approach to the regulation of financial and credit products by enabling it to intervene in a range of ways (through making a product intervention order), where it considers that a product or class of products have resulted/will result/are likely to result in 'significant consumer detriment'.

Importantly, the power may be exercised by ASIC whether or not there has been a breach of the law, provided that ASIC considers there is risk of 'significant consumer detriment'. This 'enables us [ASIC] to take action before significant detriment, or further detriment, is done to consumers, so that we can better uphold community expectations on the conduct of firms that issue or distribute products'.

The guidance notes that the PIP is complemented by the design and distribution obligations regime (DDO regime) which is set to commence from October 2021. ASIC writes that once the DDO regime is in place, consumer outcomes should improve and it 'may be less likely that we [ASIC] will be required to exercise the product intervention power' going forward.

'Significant consumer detriment' – the basis for ASIC intervention

As already stated, ASIC can make a product intervention order if it is 'satisfied that a product (or class of products) 'has resulted, will result or it likely to result' in significant consumer detriment'.Regulatory Guide 272 provides high level guidance on the meaning of 'significant consumer detriment, and the factors the regulator will take into account when deciding whether there has been 'significant consumer detriment'. 

Broad approach

• 'Consumer detriment': Referencing the revised explanatory memorandum, the guidance says that detriment is intended to 'take its ordinary meaning', though it is 'intended to cover a broad range of harm or damage that may flow from a product'. The guidance states that this might include: a) harm that is financial in nature (eg actual/potential financial loss to consumers resulting from a product); and/or b) harm that is non-financial in nature (eg impacting a person's credit rating).
• When is consumer detriment significant? The term ‘significant’ is not defined in either the Corporations Act 2001 (Cth) (Corporations Act) or the National Consumer Credit Protection Act 2009 (NCCP Act). The guidance states that whether consumer detriment (or likely detriment) is significant will depend on the individual circumstances of the matter.
• Significant detriment to consumers may result from a product itself and/or from the circumstances in which it is offered to consumers: ASIC states that significant detriment to consumers can 'emerge at any point in the lifecycle of a product' and may be the result of 'intentional, reckless or inadvertent industry conduct'. The guidance makes clear that detriment may arise as a result of a product's inherent design features and/or consistent with the decision in Cigno Pty Ltd v Australian Securities and Investments Commission [2020] FCA 479 (Cigno) as a result of the circumstances in which the product is offered (eg marketed or targeted at) consumers. ASIC gives a number of examples of where detriment could occur including where: products are not fit for purpose, sales or marketing techniques prioritise commercial interests over consumer interests, and 'shrouding key features of a product, including fees and how they are charged'.

Factors ASIC will take into account

• Table 1 (p17) of the guidance sets out the factors ASIC will take into account when determining whether there has been significant consumer detriment.These include: a) the nature and extent of the detriment; b) the actual or potential financial loss to consumers resulting from the product; c)the impact that the detriment has had, will have or is likely to have on consumers; d) any other matter prescribed by regulations; and e) any additional factors that ASIC considers relevant in determining whether a product (or class of products) has resulted, will result or is likely to result in significant consumer detriment.

• Consistent with the approach in the draft guidance, the final version does not specify the weight to be given to any factor on the basis that it will depend on the individual circumstances.
• The consultation sought feedback on additional factors that ASIC might take into account.Report 661 explains that ASIC declined to include the following additional factors - the number of complaints about the product; the socio-economic context of consumers who are impacted; the principle of fairness in assessing the nature and extent of detriment; the potential benefits of the product to the consumer – in the guidance on the basis that it considers them to already be 'encapsulated' in the factors set out in Table 1.
• Report 661 also flags that ASIC declined to include two other suggested factors in the list - the age of the product and whether there has been a breach in the law - on the basis that it considers it 'unlikely' that either 'will be relevant to determining whether the product (or class of products) has resulted, will result or is likely to result in significant consumer detriment'.

When will ASIC be likely to intervene? 

• ASIC states that the 'product intervention power is not directed towards eliminating all risk from the financial markets' adding that it will not exercise the power 'solely on the basis that a particular investment product has reduced in value and resulted in losses to consumers'. 
• The guidance states that ASIC is more likely to intervene when significant consumer detriment has resulted/will result or is likely to result because the product has been designed without consumer needs in mind; or 'is being distributed to, or targeted at, consumers who are unaware of the product’s risk and whose objectives are inconsistent with that product offering'.
• Consistent with the approach taken in the draft guidance, the final guidance does not set benchmarks or thresholds as to when ASIC will exercise the product intervention power.In report 661, ASIC explains that this is because: a) what will constitute significant consumer detriment will depend on the individual circumstances in each case; and b) because it considers that 'providing additional benchmarks for when we [ASIC] will exercise the power may unduly limit the scope of the power and, in turn, limit our ability to improve consumer outcomes'. ASIC suggests that over time, as it uses the product intervention power, its interpretation of significant consumer detriment may become clearer as industry will have access to examples of ASIC's approach.

It's not necessary that the product be 'inherently harmful'

Consultation Paper 313 included two case studies - automatic rollover of term deposits and the practice of 'flex commissions' - to illustrate the circumstances in which ASIC may have considered using the product intervention power (had it been available) to address consumer detriment identified at the time.

Report 661 notes that some submissions expressed the view that the detriment identified in each example was due to mis-selling of the product rather than to the product being 'inherently harmful' and argued on that basis that the product intervention power should only be used when a feature of a product, rather than mis-selling of the product, results in significant consumer detriment.

Responding to this, ASIC emphasises that, 

'the product intervention power is not limited to cases where products are inherently harmful….we are of the view that significant consumer detriment can arise throughout the life cycle of a product. This includes harm arising from: the product’s intrinsic features; how, and to whom, the product is distributed; or a combination of these factors.When significant consumer detriment arises as a result of the use of a product by consumers to whom it has been inappropriately sold, we will consider the range of regulatory and enforcement tools available to us, including the product intervention power'.

Products that can be subject to intervention 

ASIC may make product intervention orders in relation to: 

• financial products regulated under the Corporations Act 2001 (Cth) (Corporations Act) e.g. 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 (Cth) (NCCPAct) eg credit contracts, mortgages, guarantees or consumer leases
• financial products, as defined by the Australian Securities and Investments Commission Act 2001 (ASIC Act) e.g. some types of extended warranties, some types of short-term credit and certain buy-now-pay-later arrangements not covered by the Corporations Act or the NCCP Act.

Section 1023B of the Corporations Act specifies that ASIC cannot intervene in relation to a financial product issued, or offered for sale, by an exempt body or an exempt public authority.

Types of orders ASIC can make

• ASIC is able to make two types of product intervention order: 1) an individual product intervention order, which applies to a specified person, or specified persons, in relation to a product; and 2)market-wide product intervention order, which applies to a person, in relation to a class of products This takes the form of a legislative instrument and is more likely to be used, the guidance states, where ASIC is seeking to 'address a practice that is relatively widespread or, even if the practice is not currently relatively widespread there is a risk the practice will be "phoenixed" or it is one that could be adopted by others'.Consistent with the Cigno decision, the guidance notes that there is no requirement that a 'class' of products include more than one product.
• Multiple elements: ASIC has wide flexibility in terms of the form that interventions might take depending on the circumstances. A product intervention order may comprise 'multiple elements'. These include (among others): banning a product or product feature, and/or imposing sale restrictions and/or amending product information or 'choice architecture' (ie design features of a product and its distribution that present choices and processes to consumers that influence their take-up and use of the product). In certain circumstances, ASIC may also require that consumers be notified about the terms of a product intervention order (and set the timeframe for doing so). This flexibility, ASIC writes, enables it to adopt a case by case approach to determining the form of intervention that is likely to be most effective in reducing the likelihood of 'significant detriment' occurring or further detriment in the particular circumstances.
• The product intervention power may be used in combination with other regulatory tools: The guidance states that where ASIC identifies instances of 'significant consumer detriment' it may use one of a combination of regulatory tools to address it. For example, where the detriment also involves unlawful conduct, ASIC may consider exercising its enforcement powers in addition to making a product intervention order.After the design and distribution obligations come into force in October 2021, ASIC says that there may be instances where it exercises its product intervention power and takes enforcement action for the breach of design and distribution obligations.

Limitations on the power 

ASIC sets out a number of limitations on the use of the power.For example: an order 'cannot impose requirements in relation to a person’s remuneration, other than so much of the remuneration as is conditional on the achievement of objectives directly related to the product interventions'.

ASIC comments in relation to this that it considers that the limitation on dealing with remuneration 'does not prevent us from intervening in relation to remuneration that is linked to the distribution of the product'.

How ASIC will make a product intervention order: consultation with affected persons

• Before making a product intervention order, ASIC 'proposes' to consult persons who are 'reasonably likely' to be affected by the order.
• The guidance says that as part of its formal consultation process ASIC will 'usually': a) identify the product and its availability to retail clients; b) describe the detriment it considers to have occurred/will occur or is likely to occur; c) outline its proposed intervention or a description of its proposed intervention.In certain circumstances the guidance says that this could include presenting a range of options for intervening.
• ASIC states that the aim of the consultation process is to 'seek feedback on our proposal to intervene'. Accordingly, ASIC will publish the proposed product intervention order, or a description of the content of the proposed order, on the ASIC website and invite the public to comment on the proposed order .
• The guidance states that the terms of the final order may differ from the draft version.
• ASIC will 'generally undertake public consultation' in this way for both market-wide and individual product intervention orders.
• If a proposed product intervention order will apply to a body that is regulated by the Australian Prudential Regulation Authority (APRA),ASIC will also consult with APRA before making the order, or with other regulators as appropriate.

Commencement and duration of product intervention orders

• ASIC is able to specify when the product intervention order will come into force.
• ASIC notes that this allows it to set a later commencement date if it considers it appropriate in the circumstances. 
• The duration of a product intervention order will depend on the circumstances of the case. ASIC can make an initial order for up to 18 months from the date it comes into force, which can be extended or made permanent with the approval of the Minister. 

Public notification of decisions

The guidance says that,

'As a general principle, it is our view that there is significant public interest in ensuring that consumers and the broader community are aware of and informed about action taken by us. Transparency and disclosure are important factors in market integrity and investor confidence, and serve to promote deterrence as well as to educate'.

On this basis, ASIC plans to publish details on the ASIC website.

The guidance states that where ASIC determines that the consultation document is market sensitive, it will be published at the weekend or overnight (ie at a time when licensed Australian securities markets are not trading).

In Report 661, ASIC notes that some respondents from the financial industry called for ASIC to engage confidentially with firms before publishing a proposed product intervention order on the basis that doing so could enable the firms in question to address ASIC's concerns with the need to make an order. Some respondents also pointed to the possible reputational damage that may result from publication of a proposed product intervention order.

In response, ASIC said that it 'will consider the best way to engage and consult with stakeholders, including firms that are reasonably likely to be affected by a proposed product intervention order and consumers who are affected, or are likely to be affected, by the product' and though under no legal obligation to confidentially engage with/notify firms before formal consultation, ''it would be likely that firms will be aware of our concerns through the course of our regulatory work, before we consult on a proposed product intervention order'.

The consequences of breaching an intervention order

If a person or firm contravenes a product intervention order, or related obligation under Pt 7.9A of the Corporations Act or Pt 6-7A of the NCCP ASIC may take enforcement action through civil proceedings or criminal prosecution.