9 April, 2019
New obligations for product issuers and distributors will also apply in two years.
What you need to know
- The passing of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019 means that:
- ASIC will shortly possess product intervention powers in respect of financial products offered to retail clients; and
- From early 2021, issuers and distributors of financial products to retail clients will be subject to new financial product design and distribution obligations.
What you need to do
- Familiarise yourself with the new amendments; and
- Review business and compliance practices in order to prepare for the new regime.
Introduction
On 3 April 2019, the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019 and is now pending Royal Assent.
The parliamentary intent of the Bill is to "ensure that financial products are targeted and sold to the right consumers, and, where products are inappropriately targeted or sold, ASIC will be empowered to intervene in the distribution of the product to prevent harm to consumers".
This Bill fulfils the government's commitment to implement relevant recommendations from the Financial System Inquiry 2015.
When it receives Royal Assent, the Bill will introduce into the Corporations Act 2001 (Cth) (the Corporations Act) and the National Consumer Credit Protection Act 2009 (Cth) a product intervention power for ASIC to prevent or respond to consumer detriment, and will amend the Corporations Act to include design and distribution obligations in relation to financial products.
What are the amendments?
ASIC's product intervention power
ASIC's product intervention power will take effect the day after Royal Assent (which is expected to occur shortly).
Even before the design and distribution obligations (discussed below) come into effect, ASIC will be able to make a product intervention order preventing an issuer from engaging in specified conduct in relation to where a financial product will, or is likely to result in, 'significant detriment' to retail clients.
This power will be available for all financial products regulated by the Corporations Act and the Australian Securities and Investments Commission Act 2009 (Cth). Notably, this will include credit products, which are not generally regulated as financial products under the Corporations Act.
When determining whether significant detriment will be caused to retail clients, ASIC's consideration can include (but is not limited to) the nature and extent of the detriment, the actual or potential financial loss to retail clients resulting from the product and the impact the detriment will have on retail clients.
It remains unclear how ASIC will use this power in practice. For example, overseas regulators have used similar powers to ban complex products such as hybrid securities from being offered to retail clients, and imposed leverage limits on retail derivatives.
Design and distribution obligations
The design and distribution obligations will take effect two years following Royal Assent. The new obligations include:
- the requirement for issuers of regulated financial products to make a target market determination (TMD) for financial products – Issuers of regulated financial products must issue a publicly available TMD for financial products specifying, among other things, the class of retail clients comprising a financial product's target market, any 'conditions and restrictions on retail product distribution conduct in relation to the product' and 'any events and circumstances that would reasonably suggest that the determination is no longer appropriate. 1
- If any changes in circumstances affect the TMD, the TMD must be updated within 10 days or product distribution of the affected retail product must be suspended.
- the requirement for issuers and distributors of regulated financial products to take reasonable steps to ensure that the distribution of a product is consistent with the TMD – Issuers of regulated financial products must take reasonable steps that will, or are reasonably likely to, ensure that retail product distribution is consistent with each product's corresponding TMD.
Issuers will be required to maintain records of TMD decisions and conduct and notify ASIC where a significant dealing in a product to a retail client has been issued inconsistently to the TMD.
Key issues with the reforms include:
- It is not clear how licensees can balance determining whether retail clients fall within the TMD against the risk of being potentially seen to have provided financial product advice to clients, by being seen to have (for example) taken into account the client's financial situation. New section 766B(3A) provides that "asking for information solely to determine whether a person is in a target market" will not "of itself" constitute personal advice. However, this still leaves open the question as to whether asking such questions, in conjunction with other questions (such as to assess product suitability more broadly) could potentially constitute personal advice.
- The range of products covered is very broad, with only exceptions for very simple products such as MySuper products and (most) ordinary shares. Notably, products quoted on a financial market such as ASX or Chi-X are not exempted. It is not clear how the regime will apply to, for example, listed real estate or infrastructure trusts where units can be purchased by any investor, and issuers and distributors have limited ability to curtail such purchases.
- Certain new provisions make clear that simply providing a financial product to a client outside the relevant target market will not automatically constitute a breach. However, presumably at some point if too many clients outside the target market are acquiring a product, a problem will arise. It is not clear at this stage where this line will be drawn.
What actions should issuer's take now?
As ASIC's product intervention power will take effect immediately upon Royal Assent, issuers of financial products should assess their financial product offerings for retail clients to ensure their product distribution conduct will not result in significant detriment to retail clients.
ASIC is likely to provide guidance on how it will interpret the design and distribution obligations. However, in the interim, issuers should commence preparing for the design and distributions obligations to take effect after 24 months of Royal Assent in early 2021. Issuers may wish to consider:
- familiarising themselves with the amendments;
- considering potential TMDs for each financial product offered to retail clients;
- developing compliance measures that will assist issuers to take reasonable steps to ensure product distribution conduct is consistent with TMDs;
- assessing the ways in which products available to retail clients are currently designed and distributed; and
- the interplay between these amendments and the recent introduction of the Banking Executive Accountability Regime, and its proposed expansion to all Australian financial services licence holders and Australian credit licence holders.
- Mr Robert Fadden, Second Reading Speech, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, 20 September 2018.
For further information, please contact:
Corey McHattan, Partner, Ashurst
corey.mchattan@ashurst.com
