22 December 2017

Proposed financial product design obligations and intervention powers

The Government has released draft legislation that proposes significant amendments to the Corporations Act 2001 and the National Consumer Credit Protection Act 2009 to improve consumer protection in relation to financial and credit products.

There are two parts to the Bill:

  • the first part introduces new “design and distribution obligations” to be imposed on people who offer or distribute financial products to retail clients
  • the second part gives ASIC extensive powers to “intervene” where a financial or credit product may lead to “significant detriment” to retail clients or consumers.

The consultation process closes on 9 February 2018.

Key takeaways in relation to the new legislation are outlined below.

Background to the reforms

Currently, the main legislative protections for people who acquire financial or credit products are requirements for clear disclosure of the terms, benefits and risks, of the products.

The Bill is a response to a Financial System Inquiry recommendation that a “targeted and principles-based product design and distribution obligation” should be introduced in line with a number of overseas jurisdictions (see further here).

The Bill:

  • requires issuers of financial products to determine what the appropriate target market for their product is
  • requires issuers and distributors of financial products to take reasonable steps to ensure that products are only marketed and distributed to people in the target market
  • gives ASIC powers to “intervene” if a financial or credit product has resulted in or will, or is likely to, result in significant detriment to retail clients or consumers.

Design and distribution obligations

Key provisions

The Bill sets out new design and distribution obligations which are proposed to apply to persons:

  • who must prepare prospectuses or other disclosure documents for offers of securities under Part 6D.2 of the Corporations Act 2001
  • who must prepare Product Disclosure Statements under Part 7.9 of the Corporations Act 2001
  • who intend to make a recognised offer of foreign securities under Part 8.2
  • who deal in, or provide advice in relation to, products of a kind referred to above.

This means that the obligations will generally only apply to products that are offered to retail clients. Some products, such as MySuper products, are excluded.

The Bill requires offerors to:

  • make a “target market determination” for the product, which describes the class of persons who comprise the target market and set out any conditions and restrictions on dealings in, or providing financial product advice in relation to, the product and
  • ensure the determination is appropriate – ie it must be reasonable to conclude that, if it were issued or sold to persons in the target market, it would generally meet the likely “objectives, financial situations and needs of the persons in the target market”
  • review the determination to ensure that it remains appropriate.

The Bill requires offerors and distributors to:

  • not deal in, or provide advice in relation to, the product unless a target market determination has been made
  • take reasonable steps to ensure that dealings in, and financial product advice provided in relation to, the product are consistent with the determination
  • notify ASIC of significant dealings that are not consistent with the determination.

The Bill also gives ASIC power to issue stop orders if there has been a breach of these obligations, to modify the Bill’s operation and to grant exemptions.

What are the implications?

The Bill also includes substantial civil or criminal penalties for failure to comply with the new obligations. It also expressly provides for civil liability to anyone who suffers loss or damage because of a breach of the obligations. The Court will also have powers, among other things, to declare contracts void.

Product intervention powers

The Bill provides ASIC with product intervention powers, which ASIC may use 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 / consumers.

If the Bill is enacted, ASIC will be able to issue an order that a person or class of persons may not engage in specified conduct in relation to the product. An order may be conditional – the Bill gives as an example a condition that the product not be issued to a retail client / consumer unless the retail client / consumer has received personal advice. ASIC will also be able to order downstream notification to retail clients / consumers.

The Bill does not elaborate what significant detriment may be but sets out a number of considerations that ASIC must take into account – including the impact that any detriment from the product has had, or will or is likely to have, on retail clients / consumers.

The Bill requires that ASIC undertake a consultation process before it makes a product intervention order.  Any order other than one relating to a particular financial or credit product will be a legislative instrument, open to disallowance by the Parliament.

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.

What are the implications?

The Bill also includes substantial civil or criminal penalties for failure to comply with the new obligations. It also expressly provides for civil liability to anyone who suffers loss or damage because of a breach of a product intervention order. The Court will also have powers, among other things, to declare contracts void.

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