14 October 2019

Retail capital raisings: ASIC’s new intervention power & design and distribution obligations

This article was written by Jim Boynton

ASIC now has broad powers to intervene in capital raisings. In addition, from April 2021 issuers of certain products (e.g. hybrids) cannot raise capital from retail investors unless they prepare a target market determination and comply with distributions and other obligations.

Product intervention orders against issuers, directors and others

Issuers of products that are available to retail investors should consider whether the way the product is designed, promoted or distributed is likely to result in ASIC exercising its new product intervention powers. This is particularly the case if ASIC has previously expressed concerns about the particular product or selling practices.

ASIC’s intervention power commenced in April 2019. ASIC now has a significant, proactive power to issue a “product intervention order” that a person not engage in specified conduct if ASIC 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). The types of interventions could include orders to:

  • amend disclosure and marketing documents
  • include product warnings and labels
  • impose distribution restrictions (e.g. a condition that the product not be issued to a retail client unless they have received personal advice)
  • ban products or conduct in relation to products.

Conduct covered by an order must be limited to conduct in relation to a retail client. An order may last up to 18 months. However, an order can remain in force for a longer period - or permanently - if the Minister so declares.

ASIC must undertake a consultation process before it makes a product intervention order. 

ASIC has issued consultation papers in relation to lending models structured to benefit from National Credit Code exemption, binary over-the-counter options and contracts for difference. Interventions in relation to similar products have been taken in Europe. 

In its first deployment of the power ASIC targeted a particular business model where a short-term credit provider and its associate charged fees under separate contracts. The order prohibited the provision of the credit and the charging of fees and charges in certain circumstances and prohibited the directors of the providers and associates from authorising the conduct. An affected company has applied to have the order declared invalid.

Substantial civil or criminal penalties apply for failure to comply with the new orders. There is potential civil liability to anyone who suffers loss or damage because of a breach of a product intervention order. The court also has powers, among other things, to declare contracts void.

Design and distribution obligations for issuers and distributors

New design and distribution obligations (DDO) will commence in April 2021. DDO will apply to a broad range of financial products including some credit products provided to retail clients. Excluded products include full paid ordinary shares except where they are expected to be converted into preference shares or the issuer carries on a business of investing into certain investments. 

Product issuers must make a target market determination (TMD) for each affected product and review the TMD at particular times. Once the new DDO requirements come into force, a product cannot be distributed until an appropriate TMD has been made. Financial services groups with a large number of products should start planning now. 

Product issuers and distributors will need to take reasonable steps to ensure that products are marketed and distributed only to people in the target market, and only in accordance with the target market determination. Additional marketing, record-keeping and reporting obligations will apply to both distributors and issuers.

For affected products TMDs will become part of the capital raising process and DDO may change the way products are marketed and distributed. 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.

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