In this article we consider ASIC’s consultation package in relation to the exercise of its new product intervention powers, including some observations about ASIC’s understanding of and proposed implementation of the new regime.
- ASIC’s product intervention powers commenced on 6 April 2019.
- ASIC has released draft guidance on how it intends to administer the regime.
- The guidance suggests that the governance and implementation processes in relation to the product lifecycle, including advertising and promotional material, will need to be constantly improved and ever-vigilant.
- ASIC expects to consult on regulator guidance on the product design and distribution obligations towards the end of this year.
ASIC’s product intervention powers (PIP) derive from amendments to the Corporations Act 2001 (Cth) and National Consumer Credit Protection Act 2009 (Cth) made under the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Cth), which came into force on 6 April 2019. This legislation was enacted alongside the legislation dealing with product design and distribution obligations, which will come into effect on 6 April 2021.
The PIP give ASIC the power to proactively intervene in relation to certain financial products and credit products by making orders to prohibit specified conduct relating to those products, on an industry or individual basis, when the conduct is or is likely to result in significant detriment to retail clients. There does not need to be a breach of the law (including the design and distribution obligations) for ASIC to exercise its product intervention powers. Product intervention orders can last up to 18 months, but can with the approval of the Minister be extended or made permanent. ASIC must consult with affected persons before making an order (and consult with APRA, if it relates to a body that is regulated by APRA). Intervention orders can only be made in respect of products that are issued or sold after the date of the order. Further information about the PIP is set out in our earlier article.
On 26 June 2019, ASIC released the following documents for public consultation:
- Consultation Paper 313 Product intervention power (CP 313); and
- A draft regulatory guide, which is attached to CP 313 (Draft RG).
The Draft RG sets out the scope of the power, when and how ASIC expects to use the power and how a product intervention order is made.
In announcing the consultation package, ASIC states that it has taken a ‘principles-based approach to the regulatory guidance’, which ‘reflects the product intervention power being a broad and flexible tool for ASIC to use’. In CP 313 ASIC considers that providing additional benchmarks for when ASIC will exercise the power will unduly limit the scope of the power.
Aspects of ASIC’s proposed approach to its new powers
To assist consultation, the paper provides case studies of past products and practices 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. The case studies chosen relate to:
- the practice of the automatic rollover of term deposits in 2009, in circumstances where there were higher rates advertised for products other than automatically-rolled products; and
- the practice of ‘flex commissions’ in the car finance market in 2011, where car dealers arranged car loans at a higher interest rate than the base rate that the financier was willing to offer and thereby earn a much higher commission.
In exercising its PIP, ASIC proposes to consider its regulatory objectives set out in section 1(2) of the Australian Securities and Investments Commission Act 2001 (Cth). ‘Significant detriment’ will be considered on a case-by-case basis, and any responses to ASIC’s assessment and publication of ‘significant detriment’ will need to be supported by evidence and data.
ASIC considers that ‘significant detriment’ can take on the following features:
- it could be non-financial harm, such as the effect on a person’s credit rating;
- it can arise where consumers are sold a product that is misaligned with their needs, understanding or expectation;
- it can be apparent detriment or hidden detriment; and
- it can arise immediately if a product is obviously inappropriate or mis-sold at point of sale, or takes time to emerge.
ASIC says it is more likely to intervene where there is consumer detriment and the product 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.
According to ASIC, detriment becomes ‘significant’ where the ‘choice architecture’ – that is, the 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 – is poor. This includes where products are not fit for purpose, sales or marketing techniques prioritise commercial interests over consumer interests and shroud key features of a product, including fees and how they are charged.
Some of the factors that ASIC considers relevant to the likelihood of significant consumer detriment include the extent and operation of any conflicts of interest, poor ‘choice architecture’ and the complexity or opacity of the product and the circumstances of its sale.
ASIC recognises that the PIP is not designed to give pre-approval for a product, or a de facto approval for a financial product where ASIC has not exercised its powers. However, there is a risk that this regime may give the wrong impression about the low level of riskiness of a product (where no intervention order is made), and may give investors a false sense of security about the degree of regulatory oversight of financial markets and products. These policy and practical concerns were a matter for Parliament, not ASIC, in devising the regime, and ASIC’s regime follows similar or analogous powers given to regulators in the United States, the United Kingdom, the European Union Hong Kong and Taiwan. Rightly, the PIP regime is not (or is not designed to be) a shield against market risk, the loss of investment capital or any other usual risks associated with investments.
The two case studies in CP 313 demonstrate, perhaps surprisingly, the breadth of ASIC’s intentions with respect to its PIP. While ASIC states that the equivalent powers in the United Kingdom were used for the sale of contingent convertible securities and binary options, and in the European Union were used in relation to contracts for difference and binary options, ASIC is evidently prepared to use its powers in more vanilla products such as term deposits and car finance. This approach in our view is a warning sign to product manufacturers that vanilla products sold without adequate advertising, where consumers are not being a fair deal, in may attract ASIC intervention. Further, ASIC’s proposed guidance that it intends to use its powers in relation to marketing material means that advertising and promotional material has taken on additional regulatory significance.
It remains to be seen whether the PIP regime inadvertently stifles innovation or curtails the development of new products or, potentially, new ways of providing financial services. Undoubtedly, this is not intention of the regime, but new extensive powers of intervention may curb entrepreneurial flair, at least until there is regulatory experience with the regime. Certainly, the threat of an intervention order has the power to damage brands and goodwill, which makes reputational risk all the more palpable.
The good news is that ASIC expects that it use of PIP will diminish over time, as product manufacturers and distributors implement effectively their design and distribution obligations. The effective implementation of design and distribution obligations, however, pre-suppose that product manufacturers have effective and robust financial product governance processes and controls in place to ensure that all aspects of the product lifecycle are well-attuned to consumers’ needs.
ASIC plans to release its final guidance on PIP in September this year.