New Design and Distribution Obligations and Product Intervention Powers for Financial Products
The bill passed both Houses in Parliament as of 3 April 2019 and passed into law on 5 April 2019.
Design and Distribution Obligations
Those who issue and distribute a wide range of financial products will now hold more direct responsibility for ensuring that the right products end up in the right hands.
The regulatory requirements regarding the issuance and distribution of financial products to retail clients in Australia is to be overhauled. New Design and Distribution Obligations in respect of financial products offered to retail customers are coming and market participants along the distribution chain will have two years to prepare. The new regime in part reflects ongoing concern that disclosures in relation to financial products (such as in product disclosure statements) are seldom read and are no longer sufficient to fully protect consumers.
The new rules require, among other things:
- Issuers to create and keep under review (periodically and pursuant to trigger events) a target market determination with a view to ensuring that products are appropriately distributed based on a general appreciation of consumer profiles;
- Issuers and distributors to take reasonable steps to ensure that the retail distribution of financial products is in compliance with the relevant target market determination; and
- Issuers and distributors to keep records and make notifications to (as applicable) issuers and regulators of dealings in products that are not consistent with target market determinations.
Product Intervention Powers
Providers of financial and credit products should ask themselves, how would we respond to an Intervention Order in respect of our products? Do we have control over distribution? Could we comply?
ASIC has new powers to intervene in the distribution of potentially harmful financial and credit products. These Product Intervention Powers will come into effect immediately.
ASIC will be granted new powers to proactively reduce the risk of significant detriment to consumers resulting from financial products and credit products (including credit contracts, mortgages, guarantees and consumer leases), by making intervention orders.
Significant detriment will be determined by the following factors (without limitation);
- The nature and extent of the detriment;
- Without limiting the above, actual or potential financial loss to consumers; and
- Any other matter specified in further regulations.
ASIC will have wide ranging powers to intervene by making an order that a person must not engage in specified conduct in respect of a financial or credit product or a class of financial or credit products, with or without conditions.
New obligations will apply to ASIC, including a requirement to consult with those likely to be affected by any order (including APRA if the order applies to a body regulated by APRA) and to notify those affected, however failure to hold such a consultation or make such notification will not invalidate any product intervention order.
These changes represent a more proactive role for the regulator. Whereas before ASIC was restricted to acting only after there had been a breach or suspected breach of the law, ASIC now has the power to step in once it perceives a risk of significant consumer detriment. This is intended to drive better consumer outcomes by preventing contraventions and the resultant harm to consumers, rather than waiting for the damage to be done.
Impact on the wider Compliance Framework
The new Design and Distribution Obligations and Product Intervention Powers should not be read in isolation. Issuers and distributors of financial and credit products will be well advised to read the new regulations in light of their wider conduct risk frameworks and compliance programmes.
Adherence to these new laws is intended to greatly assist issuers and distributors in their endeavours to achieve better consumer outcomes including to assist issuers and distributors in demonstrating a “client first”, “outcomes” approach, and supporting visibility and greater control over distribution networks. There is though further work to do, in particular ASIC will be developing regulatory guidance to support the new Design and Distribution laws.
The groundswell of recent legislative and regulatory changes (following numerous much publicised industry investigations) are founded on fundamental principles of accountability, fairness, honesty and transparency with a focus on conduct and culture and customer outcomes. The new Design and Distribution Obligations and Product Intervention Powers are no different. Sensible implementation will assist issuers and distributers in their efforts to comply with numerous other new and enhanced laws and regulations, including (without limitation):
- Requirements under the Banking Executive Accountability Regime (which are likely to be extended across the financial services industry) to act honestly, with integrity, due skill and diligence and to have procedures for identifying and remediating problems;
- Strengthened obligations under the Corporations Act for financial services licensees to act efficiently, honestly and fairly; and
- Anticipated changes to the regulation of conduct and culture.
Our Legal and Risk Advisory teams can assist with both legal and regulatory advice and practical implementation of the new rules, from amendments to policies and procedures, to training, remuneration, governance and assurance.