The Australian Government has issued a Proposals Paper in respect of the recommendations made by the Financial System Inquiry to introduce design and distribution obligations on issuers and distributors of financial products and a product intervention power for ASIC.
The Australian Government has issued a Proposals Paper in respect of the recommendations made by the Financial System Inquiry (FSI) to introduce:
- design and distribution obligations on issuers and distributors of financial products; and
- a product intervention power for the Australian Securities and Investments Commission (ASIC).
The Proposals Paper seeks feedback on the implementation of these recommendations and the possible effect of the recommendations in practice if implemented.
These reforms will significantly impact the ways in which issuers manufacture and distribute financial products, and propose a new ASIC notification obligation. The product intervention power will fundamentally increase the powers available to ASIC.
Design and Distribution Obligations
The design and distribution obligations are intended to increase accountability for issuers and distributors in ensuring that products are designed with consumer needs in mind and are marketed at appropriate sections of the population.
Issuers of financial products under this obligation will be expected to:
- identify appropriate target and non-target markets for products. This involves considering whether the product is satisfying the investment or risk management needs of the target market and the ability of consumers in the target market to understand key features of the product;
- select distribution channels that are likely to result in products being marketed to the identified target market. This includes considering the complexity of the product and whether the distribution channel or marketing approach will enable customers to understand the product; and
- review arrangements frequently to ensure arrangements remain appropriate. Importantly, the Proposals Paper contemplates that issuers would be required to advise ASIC if a review identifies that a distributor is selling a product outside of the intended target market and the steps it intends to take in order to address those issues.
In addition, distributors of financial products will be expected to:
- put in place reasonable controls to ensure products are distributed in accordance with the issuer’s expectations; and
- comply with reasonable requests for information from the issuer in relation to the product review.
The Government proposes that given the significant nature of the design and distribution obligations that the Government review the proposed obligations after five years to ensure they are operating efficiently and effectively.
Product Intervention Power
The FSI recommended that the Government provide ASIC with a product intervention power in order for ASIC to enforce a more proactive approach to market regulation, and in effect, to reduce the risk of significant detriment to consumers.
The Government proposes that ASIC would be able to make interventions in relation to the product or product feature, the types of consumers that can access the product or the circumstances in which consumers access the product. The possible product interventions are:
- disclosure obligations;
- warning statements;
- amendments to advertising documents;
- amending features of the product;
- banning the product; and
- restricting distribution of the product.
Remuneration is not covered as a product intervention.
In using the power, it is proposed that ASIC must identify a risk of significant consumer detriment, undertake appropriate consultation and consider the use of alternative powers. Interventions would be able to be made by ASIC an on individual or market-wide basis. The Government proposes that an intervention by ASIC should last for up to 18 months during which time the Government will consider whether the intervention should be permanent.
The Government seeks feedback on the range of proposals in the Proposals Paper from all interested parties with submissions due by Wednesday 15 March 2017. We will keep you informed of further developments.
Further information in relation to the Government’s Proposal Paper can be accessed in the Treasury’s media release.
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2019