This article was written by Daniel Taha, Alessia Morgan and Jim Boynton.
The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) legislation has passed with amendments (including extending the regime to credit facilities). ASIC's new intervention powers are likely to commence this month. Product issuers should start reviewing affected products now.
The legislation will make significant amendments to the Corporations Act 2001 and the National Consumer Credit Protection Act 2009 (NCCP Act) with the aim of improving consumer protection in relation to financial and credit products. Key provisions of the legislation (before the amendments) were set out in our September alert.
Amendments extend the regime
This week's amendments were made as a result of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and a Parliamentary inquiry into the legislation. In short, the amendments:
- extend the regime to financial products regulated under the Australian Securities and Investments Commission Act (including credit facilities);
- provide a further private cause of action where an entity fails to make a target market determination under the design and distribution obligations (DDO) regime; and
- enable the court, on application from ASIC, to make orders to benefit non-party consumers who have suffered loss or damage because of contraventions of the DDO regime.
The extension of the regime to financial products under the ASIC Act means that the DDO regime and ASIC's product intervention powers will extend to credit facilities provided to a retail client. No specific amendments to the definition of retail client are included in the legislation to introduce a price or value test for credit facilities. Subject to any new regulations, this means that the obligation may apply to persons providing credit to consumers and small businesses. Whether the credit is regulated under the NCCP Act is irrelevant.
Product intervention powers likely this month
ASIC's new product intervention powers commence as soon as Royal Assent is granted. Royal Assent is expected in the next few days.
The legislation will give ASIC power to issue a "product intervention order" if it is satisfied that a financial product or a credit product "has resulted in or will, or is likely to, result in significant detriment" to retail clients or consumers (as applicable).
6 reasons to review every affected product now
Even though product issuers will have 2 years before the DDO commence, they should start reviewing all affected products now. In addition to considering DDO, the review should consider other proposed changes resulting from the Royal Commission. For more details on the Royal Commission's final report please see our Royal Commission hub.
The review should take into account:
- whether the way the product is designed, promoted or distributed is likely to result in ASIC exercising its new product intervention powers (eg. if ASIC has previously expressed concerns about the particular product or selling practices);
- any likely changes to the way the product is distributed given the Royal Commission's proposed commission and other changes in relation to products, financial advisers and mortgage brokers (eg the proposed removal of the point of sale exemption in the NCCP Act);
- the prohibitions on hawking that are proposed to apply to at least superannuation and insurance products;
- the proposal that under the BEAR regime there will an accountable person responsible for the end-to-end management of products;
- any changes to the issuer's risk tolerance due to the above, the Royal Commission or ASIC's tougher approach to enforcement; and
- the new DDO (see below).
What are the design and distribution obligations?
In summary, DDO will require:
- issuers of regulated products to prepare a target market determination (TMD) for each affected product that must be publicised and reviewed; and
- issuers and distributors of regulated products to take reasonable steps to ensure that the distribution of a product is consistent with the most recent TMD.
Additional marketing, record-keeping and reporting obligations will apply to both distributors and issuers.
DDO process for product issuers
DDO will come into force 24 months after Royal Assent. By that time product issuers will need a TMD for every affected product. Groups with a large number of products should start planning now. Once the new DDO requirements come into force, a product cannot be distributed until an appropriate TMD has been made.
We have developed a methodology for product issuers to review their products and distribution strategy to comply with DDO. We would be pleased to discuss this with you.