ASIC starts dialogue on product intervention powers

By Matt Daley, Vanessa Pallone and Rebecca Wong
11 Jul 2019
ASIC has invited feedback on its proposed administration of its product intervention powers which will allow ASIC to intervene and make orders if a financial product is likely to result in "significant consumer detriment".

In December 2014, the Financial System Inquiry report made a recommendation that ASIC be given a product intervention power. This was later supported by the Financial Services Royal Commission, and on 5 April 2019, the power was made official upon the assent of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019.

The Act provided two key reforms:

  • a product intervention power for ASIC; and
  • a new governance regime for the design and distribution of financial products.

ASIC has now released Consultation Paper 313 Product Intervention Power (CP 313), which opens the dialogue on ASIC's proposed administration of its new product intervention power. CP 313 also attaches a Draft Regulatory Guide which provides guidance on ASIC's interpretation of the scope of the power, when and how ASIC expects to exercise the power to make a product intervention order and how a product intervention order is made. The Draft Regulatory Guide is expected to be finalised and released in September 2019 following ASIC's consultation process.

ASIC proposes to conduct a separate consultation process in respect of its proposed guidance on the design and distribution obligations later this year.

While ASIC states that the product intervention power is not directed towards eliminating all risk from financial markets, ASIC does note that, "[this] is an incredibly important addition to ASIC's regulatory toolkit. ASIC can now step in and respond to significant consumer detriment in a targeted and timely way".

Power exercisable even where no breach has occurred

The product intervention power allows ASIC to exercise the power even where there is no breach of the design and distribution obligations. ASIC views this aspect unique in that it allows ASIC to reduce significant detriment to consumers, rather than stepping in only after a breach of the law. However, as noted in CP 313, the product intervention power is not intended to be used for pre-approval of products, which the 2014 Financial System Inquiry initially explained would likely result in "moral hazard" in that it could imply that a product is low-risk. Although it remains a risk that this may be the unintended consequence of the regime.

Purpose of the product intervention power

ASIC is empowered to make a product intervention order when it is satisfied that a product, or class or product, has resulted, will result or is likely to result in "significant consumer detriment".

ASIC note in the Draft Regulatory Guide that "significant consumer detriment" can arise as a result of a product's inherent design features, as well as the way in which the product is marketed or targeted at consumers. ASIC also note that a product may cause "significant consumer detriment" even if a person has complied with all applicable disclosure requirements, including the design and distribution obligations of that product. A "significant detriment" to consumers can emerge at any point in the life cycle of a product.

ASIC also note that they can intervene when it considers a product is "likely" to result in "significant consumer detriment". In considering if a product is likely to result in "significant consumer detriment", ASIC will consider amongst other things, factors that make "significant consumer detriment" more likely, such as:

  • the extent and operation of any conflicts of interest;
  • the complexity and opacity of the product;
  • the circumstances of its sale and evidence or risk of consumer confusion or misunderstanding; and
  • how choices and processes are presented to consumers that influence their take-up and use of the product.

ASIC does not propose to set benchmarks or thresholds as to when it will exercise the product intervention power (as to do so will, in ASIC's view, unduly limit the scope of its power) and instead, has provided industry with some comfort that it will consult ahead of the exercise of its power, with the aim of receiving feedback on its proposal to intervene from persons who are reasonably likely to be affected by the order. ASIC will however make such consultation public on its website.

Types of interventions

ASIC can intervene in respect of financial and credit products and can make two types of orders:

  • an individual product intervention order (which applies to a specified person, or specified persons, in relation to a product); or
  • a market-wide product intervention order (which applies to a person, in relation to a class of products).

ASIC has the power to order a ban in respect of a feature of a product or, more severely, order a ban in respect of the issue of the product altogether. ASIC can also order that a product be offered to specific classes of consumers, an order that a product be offered through personal advice only, restricting marketing or prohibiting the distribution of a product without prescribed improvements.

An order may last for up to 18 months but may remain in force permanently if determined by the Minister (after consultation with ASIC).

When do you have to take action?

Comments are due on CP 313 on 7 August 2019. ASIC aims to release its final regulatory guide in September 2019.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.