11 April 2019
Design and Distribution Obligations and Product Intervention Powers legislation has been passed
The long-awaited Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019 (DDO & PIP Act) has passed and received Royal Assent on 5 April 2019.
What does the DDO & PIP Act do?
In general terms, the DDO & PIP Act amends the Corporations Act 2001 and the National Consumer Credit Protection Act 2009 by:
- imposing design and distribution obligations (DDO) on:
- product issuers to make a target market determination in relation to certain retail financial products;
- product distributors to not distribute products unless a target market determination is in place in relation to those financial products; and
- product issuers and distributors must take reasonable steps to ensure that distribution is consistent with the target market determination; and
- giving ASIC product intervention powers (PIP) 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.
We provided a detailed summary of the DDO & PIP Act in our update late last year.
What financial products does the DDO & PIP Act apply to?
Generally, the DDO & PIP Act applies to financial products and credit products that are issued and distributed to retail customers. The DDO & PIP Act does not apply to financial products acquired solely by wholesale clients.
In the previous version of the draft legislation, the DDO obligations applied only to financial products that required disclosure under the Corporations Act 2001. However, following recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and Senate Economics Legislation Committee, the DDO obligations have been extended to financial products that are regulated under the Australian Securities and Investments Commission Act 2001, which includes credit products.
What other amendments were made?
In addition to extending the category of financial products to which the DDO regime applies, the DDO & PIP Act provides for the following additional items that were not included in the draft legislation:
- provides a further private cause of action where an entity fails to make a target market determination under the DDO regime;
- provides ASIC with the power to ask a court to make orders to benefit non-party consumers who have suffered loss or damage because of a contravention of the DDO regime for which a private action could be commenced; and
- Extends the PIP regime to all financial products regulated by the Australian Securities and Investments Commission Act
What are the offences and penalties?
Under both the DDO regime and the PIP regime, in general terms, the failure to comply with the provisions gives rise to:
- liability to the state through civil penalty proceedings or criminal prosecution. A contravention of any obligation in the new regime is both a civil penalty provision and an offence; and
- liability to persons suffering loss or damage through civil action.
The Treasury laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019, which received Royal Assent on 12 March 2019, amends the civil penalty and criminal offence provisions of the Corporations Act 2001 and the National Consumer Credit Protection Act 2009 dealing with the DDO regime and the PIP regime upon the commencement of such regimes.
When does the DDO & PIP Act apply?
6 April 2019 (already in force)
6 April 2021 (2 years)
The PIP powers are already in force so product issuers need to assess which of their products are subject to those powers and make sure that there are compliance and governance systems in place to manage any risks of the PIP powers being exercised.
Although the DDO obligations will not commence for 2 years, we recommend that product issuers start thinking about how they will satisfy their DDO obligations when they are in force and build this into their compliance systems and processes as well as working with their distributors to ensure that they understand and can carry through those obligations.
ASIC and industry guidance will also be needed to better understand the detail around target market determinations, and other DDO obligations, and ensure that the principles are applied consistently by industry for the same products or otherwise it will cause much confusion in the market place and varied outcomes that might not aid consumer confidence. It requires an industry-wide approach, given that the financial services industry comprises product issuers and product distributors and is built on a network of interrelationships in the product cycle among financial services entities.
Harry has represented a number of listed public companies, large private companies and government organisations...More about Harry
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