Last time we talked about the Government’s introduction of design and distribution obligations for financial products in a draft Bill currently undergoing consultation. In today’s article, part two on the draft Bill, we discuss the Australian Securities & Investments Commission’s proposed new product intervention power, also contained in the draft Bill.
By Dr Drew Donnelly, Compliance Quarter.
As mentioned in our previous piece, the existing regulatory framework for financial products relies extensively on disclosure for customer protection. This limitation is compounded by the fact that the Australian Securities & Investments Commission (ASIC) is only empowered to intervene where there has been a breach or suspected breach of the law. This has meant that, in various cases in the past, ASIC has not been unable to intervene to protect consumers from detrimental financial and credit products.
In its regulatory impact analysis, contained in the Explanatory Memorandum to the draft Bill, the Government identifies several product issuances where, arguably, ASIC should have been able to intervene but had no legal power to do so (see p53):
- mortgage managed investment schemes (MISs). Close to 100 of such schemes were frozen in the market downturn during the global financial crisis. Many consumers did not expect that the investments would be so illiquid;
- unlisted debenture investments. More than 1,500 consumers lost more than $100 million with many such consumers under the misapprehension that the investments were similar in risk profile to bank term deposits.
In both cases ASIC was limited in its response to the emerging risk to providing guidance on disclosure without the power to impose any disclosure requirements. In response to such concerns, the Financial System Inquiry (FSI) recommended an intervention power for ASIC, a recommendation that has been taken up by the Government in the draft Bill.
Product Intervention Power
The draft Bill accommodates this proposal by introducing a new intervention power into the Corporations and Credit Acts in relation to financial and credit products. The draft Bill sets out:
- the products which might be the subject of the power. Financial products that the intervention power might be applied to include securities, insurance products, derivatives, and superannuation products. Note, in general it only applies to the issuance of those products (i.e. not to sale) and primarily where those products are issued to retail customers. It also applies to a wide range of credit products;
- when the power might be used. The new intervention power would be available for ASIC where ASIC is satisfied that a product or class of products has resulted, or is likely to result, in significant detriment to relevant persons;
- the content of the power. The proposed power is broad. It would allow banning a person from issuing a product or class of product, directing that a product only be offered to certain consumers or directing that a product not be issued without an appropriate warning label;
- procedural requirements. ASIC must comply with key procedural requirements before making an order, these relate to consultation and the issuance of a public notice prior to an intervention.
To read more about the proposed intervention power go to https://treasury.gov.au/consultation/c2017-t247556. If you wish to make a submission on the draft Bill, you can do so before 9 February 2018.
To discuss this more with the team at Compliance Quarter, click here.