The Australian Securities and Investments Commission (ASIC) has released a consultation paper and draft regulatory guide setting out the regulator's proposed guidance on exercising the product intervention power introduced in the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019.
An 'incredibly important addition to ASIC's regulatory toolkit'
ASIC comments that the power is unique in its focus on reducing significant detriment to consumers, rather than stepping in only after a breach of the law. ASIC adds that it can also use the power on a market-wide basis to address industry-wide problems.
Announcing the consultation ASIC Deputy Chair Karen Chester said, 'The product intervention power is an incredibly important addition to ASIC's regulatory toolkit. ASIC can now step in and respond to significant consumer detriment in a targeted and timely way. But there are also important checks and balances – it is a temporary intervention power and we must consult before each and every use.'
Scope of the consultation
The consultation covers ASIC's proposed guidance on the product intervention power, including with respect to the following.
'Significant consumer detriment'
ASIC can make a product intervention order when it is satisfied that a product (or class of product) has resulted, will result or is likely to result in significant consumer detriment. ASIC proposes to provide high-level guidance on: the meaning of consumer detriment and how it can arise and the factors it will take into account in considering whether a product has resulted/will result/is likely to result in significant consumer detriment.
The meaning of 'significant consumer detriment':
- When is consumer detriment significant? The term ‘significant’ is not defined in the Corporations Act or the National Credit Act. ASIC states that whether consumer detriment (or likely detriment) is significant will depend on the individual circumstances of the matter.
- What can cause significant detriment to consumers? ASIC states that significant detriment to consumers can emerge at any point in the lifecycle of a product and can be caused by intentional, reckless or inadvertent industry conduct. ASIC gives a number of examples of this including: products that are not fit for purpose, sales or marketing techniques that prioritise commercial interests over consumer interests, and 'shrouding key features of a product, including fees and how they are charged'.
- Factors to be taken into account: In considering whether a product has resulted, will result or is likely to result in significant consumer detriment ASIC will take into account relevant factors including: the nature and extent of the detriment; the actual or potential financial loss to consumers resulting from the product; the impact that the detriment has had, will have or is likely to have on consumer; any other matter prescribed by regulations.
When ASIC will 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'. ASIC writes that it is more likely to intervene when significant consumer detriment has resulted, will result or is likely to result from such a product, and it: has been designed poorly 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.
No benchmarks
ASIC notes that it does not propose to set benchmarks or thresholds as to when it will exercise the product intervention power because to do so would 'unduly limit the scope of the power, which is intended to be able to address a broad range of harm or damage that may flow from a product'.
The types of interventions ASIC can make
ASIC is able to make two types of product intervention orders under the product intervention power: 1) an individual product intervention order, which applies to a specified person, or specified persons, in relation to a product; or 2) a market-wide product intervention order, which applies to a person, in relation to a class of products. ASIC states that it may be more likely to 'intervene on an individual basis (eg for a specific product issued by a named firm) if the problem is specific to a particular entity or person.'
An order may comprise 'multiple elements': ASIC gives a number of examples of the interventions in relation to a product (or class of products) that it could take, noting that a product intervention order may comprise 'multiple elements'. These include: 1) ordering that a product (or class of products) only be offered by way of issue to specific classes of consumers; 2) ordering that a product (or class of products) only be offered by way of issue in specific circumstances (eg through personal advice or through a deferred sales model); 3) ordering the amendment, restriction or banning of marketing, ‘choice architecture’, promotional and disclosure material relating to a product (or class of products); 4) ordering that a product (or class of products) not be distributed without prescribed improvements to the information provided to consumers; 5) ordering the amendment or banning of remuneration arrangements that are conditional on the achievement of objectives directly related to the product (or class of products) (eg when remuneration is linked to product distribution); and 6) ordering the banning of the issue of a product (or class of products).
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'.
Consultation with affected persons
Before making a product intervention order, ASIC must consult persons who are 'reasonably likely' to be affected by the order.
ASIC proposes that as part of its formal consultation process it will: a) identify the product and its availability to retail clients; b) describe the significant consumer detriment that has occurred/will occur or is likely to occur, and set out its reasons for making this assessment; c) set out its proposed intervention or a description of our proposed intervention; and in certain circumstances, present 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 a consultation document on its website for public consultation for both market wide and individual orders. ASIC writes that it will seek broad feedback, including in relation to the significant consumer detriment we have identified. 'However, we will expect submissions to be supported by evidence and data'. With respect to the time required for consultation ASIC states that 'the time we provide for responding to consultation will depend on the circumstances of the significant consumer detriment'.
Too long? Some media reports have expressed criticism of the time the consultation period is likely to take. The AFR suggests that the consultation process will take several months, raising the possibility that more consumers could be harmed in the period between identifying the problem, starting the consultation and taking action.
When a product intervention order will commence
- 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.
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 National Credit Act, ASIC may take enforcement action through civil penalty proceedings or criminal prosecution.
Case studies
To assist consultation, the paper includes case studies of past products and practices — automatic rollover of term deposits and the practice of 'flex commissions' — to illustrate the circumstances in which ASIC may have contemplated using the product intervention power (had it been available) to address consumer detriment identified at the time.
ASIC comments that the 'case studies are intended to be illustrative only and do not indicate a current intention by ASIC to exercise the product intervention power in relation to term deposits or flex commissions'.
ASIC to exercise its product intervention powers from the close of consultation
The product intervention power is available for the regulator to use now. However, ASIC states that it does not plan to exercise the power before the close of consultation. ASIC states that it 'may begin consulting on particular uses of the product intervention power before finalising and publishing the regulatory guide. However we will not make a final decision on exercising the power before the close of consultation on the regulatory guide'.
Timing
- The deadline for submissions on the proposed guidance is 7 August.
- ASIC plans to release a regulatory guide in final form in September.
- ASIC will consult separately on its approach to the design and distribution obligations, 'towards the end of the year'.