The introduction of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 (Cth) (Bill) is a move towards better consumer protection within the financial services industry. It will require offerors and distributors of financial products aimed at retail clients to ensure that the products meet certain standards and are fit for their purpose. The Bill will generally apply to offers of financial products that require disclosure under the Corporations Act or are exempt from disclosure. This catches financial products requiring a PDS under Part 7.9, disclosure to investors under Part 6D and those products which are exempt. The proposed amendments will mean that right from the initial design stage of a financial product, the end consumer must be borne in mind to ensure that the product is built to their needs.
The new obligations are split into four new design obligations and five new distributions obligations.
What are the Design Obligations?
Design obligations are imposed on the person (known as the offeror) who is responsible for developing the product and disclosure documents. In this context, the offeror is also sometimes referred to as the ‘issuer’. Their obligations are as follows.
To make a target market determination: Financial products have occasionally been provided to consumers in situations where the product was unsuitable, either because of a sales-oriented culture, or a lack of knowledge and controls over the distribution. The target market determination at the design stage is important to ensure that the product is appropriate and that the required distribution channels are feasible and appropriate.
Offerors will now be required to identify, and to determine, the target market of the product at the beginning of the design stage. This will include specifying the class of intended retail consumers, any restrictions or conditions on the distribution, in what circumstances the determination would no longer be valid and how often the determination will be reviewed.
The determination also places heavy reliance on the distribution channels when deciding whether the product is appropriate. For example, the offeror may restrict the way the product is to be distributed to ensure that only certain classes of retail consumers are targeted.
To adequately and frequently review the determination: The new Bill requires offerors to frequently and adequately review the determination to ensure that it remains appropriate. Offerors must identify, during the market determination, what events and circumstances (“review triggers”) may suggest that the determination is no longer appropriate, and if no review triggers arise, confirm the maximum period of time between reviews of the determination. The review triggers are dependant on the nature of the product and the circumstances surrounding its issue, but generally, ASIC would expect offerors to consider circumstances which could materially change a factor previously considered in the determination, whether the product is being taken up by the target consumers and any feedback received.
If an offeror does not experience any review triggers, they must conduct a review at reasonable intervals. What is considered “reasonable” is open to interpretation and will vary from product to product, but when considering reasonableness, the offeror must consider whether the review is often enough for the offeror to decide whether trigger review events remain appropriate. This includes considering the likelihood, nature and extent of detriment to consumers if a trigger review event has not been updated and, had it been updated, whether the determination would be likely to be considered inappropriate.
Duty to keep records: It is no secret that adequate record keeping is a sign of good governance and compliance. The offeror is required to retain details of all decisions regarding a product market determination, review triggers, review periods and other decisions relating to the determination. This supports the notion that effective record keeping enhances the offeror’s compliance obligations.
Notifying ASIC: If an offeror becomes aware of significant dealings in a product which are inconsistent with the market determination, the offeror must notify ASIC within 10 business days. The definition of “significant” has not been defined in the Bill, but the Explanatory Memorandum says that it is intended to take its ordinary meaning in the context of the new provision. The Explanatory Memorandum goes on to state that generally this would mean dealings that are “worthy of [ASIC’s] attention” having regard to the object of the new regime (i.e. providing better consumer protection) and the issuer’s role as the product’s designer but ultimately would be determined in the circumstances of each case. While this may appear to be ambiguous, it encourages organisations to be on top of their products and consumer base and to be able to readily respond to changes.
What are the Distribution Obligations?
The distribution obligations apply to those people that engage in “retail product distribution conduct”. These people, referred to as distributors, are responsible for making offers, giving advice or giving disclosure documentation to potential investors. A distributor will often be the same person as the offeror, but it can be a third party. Notably, the distributor must be a ‘regulated person’ who engages in retail product distribution conduct. They will be considered to be engaging in retail product distribution conduct if they:
- issue or arrange to issue a financial product
- provide financial product advice
- give a PDS or other disclosure documents, or
- make a recognised offer.
The obligations on the distributor are as set out below.
Not to engage in retail product distribution unless a target market distribution has been made: If the distributor believes that a determination has not been made, the distributor must not offer the financial products. If the distributor is unsure whether a determination is valid, they are able to continue with the distribution if they have made all reasonable enquiries and believe on reasonable grounds that the determination is valid. Although this is designed to enhance consumer protection, it is not meant to be cumbersome or a hindrance to the distributor so there is no obligation on them to go above and beyond having a reasonable belief that they are able to offer the products to the intended consumers
Not to engage in retail product distribution if the determination may not be appropriate: If a distributor is aware, or should reasonably have known, that a determination is no longer appropriate through, either, a review trigger event occurring, or some other event occurring which would or could render the determination inappropriate, they are not to engage in the distribution of that product. The onus is on the offeror to review the determination and amend it as necessary.
To take reasonable steps to ensure that the distribution is consistent with the market determination: Distributors have a duty to make sure that the consumer is the right consumer for the product by taking reasonable steps to meet the market determination. The definition of “reasonable steps” in this context is a risk management approach which requires the distributor to consider relevant risk factors. These will include the likelihood of their dealings or advice resulting in a class of consumers outside the target market acquiring the product, the nature and degree of harm or likely harm which could result from the incorrect consumer target market acquiring the product and how the likelihood should s be mitigated.
To collect, keep and provide distribution information: Distribution information is a defined term in the Bill but generally it includes any information contained in the market determination, details of any complaints against the distributor, details of any significant dealings and what steps the distributor has taken to meet the market determination. Once the offeror o has requested the distribution information, the distributor has 10 working days to fulfil the request.
To notify ASIC of significant dealings: Distributors are under the same obligation as offerors to notify ASIC of any significant dealings with financial products to which a determination applies.
As well as the offerors and distributors having increased obligations designed around consumer protection, the new Bill enhances ASIC’s powers to intervene in the offering of a financial product if the product does not meet the new market determination requirements. The powers include ASIC being able to issue stop orders if certain contraventions of the regime are committed, and to intervene in relation to the distribution if certain conduct is identified. These are in addition to the more common civil and criminal penalties which are available. Notably, a contravention of any obligation is both a civil penalty and a criminal offence.
Will the Bill Work?
The Bill is a positive move towards greater consumer protection, but it is yet to be seen whether the risk management approach to reviewing market determinations and self-reporting to ASIC will be effective. In an industry which is dominating the headlines for poor risk management and consumer treatment, is now the right time for ASIC and Parliament to hand the reigns back to organisations?