Design and distribution obligations and product intervention powers

What you need to know

• The government has proposed a framework that imposes greater responsibility on product issuers and distributors to design and distribute financial products to retail clients in a way that is appropriate to the consumer segments at which those products are targeted.

• It is also proposed that ASIC will be given a power enabling it to intervene in relation to a product, the types of consumers that can access it or the circumstances in which consumers can access the product.

• Implementation of the proposed reforms will involve an extensive consultation process, with submissions on the current proposals paper open until 15 March 2017.

What you need to do

• Prepare and provide your written submissions on the proposed framework to the Commonwealth Treasury by 15 March 2017.

• If you have any questions about the proposed design and distribution obligations and product intervention power, and how they may affect you, please contact us.

The Final Report of the Financial System Inquiry (FSI) recommended that issuers and distributors of financial products be made more accountable for consumer outcomes by the introduction of design and distribution obligations, and that a temporary product intervention power be granted to ASIC, enabling it to "take a more proactive approach to reduce the risk of significant detriment to consumers".

In its Response to the FSI, the federal government agreed with the recommendations regarding design and distribution obligations and an ASIC product intervention power.  A similar product intervention power to the one currently proposed has been available to the UK's FCA for several years.
On 13 December 2016, the Commonwealth Treasury released a paper outlining a proposed framework for implementing the FSI's recommendations, and seeking stakeholders' views on those proposals.  

Overview of proposals

The proposed design and distribution obligations, if adopted in the form set out in the proposals paper, would have broad application, and would require issuers of financial products to identify target and non-target markets for their products, select distribution channels that are appropriate for the identified target market and conduct reviews of their distribution arrangements with reasonable frequency to ensure these continue to be appropriate for that market.  Distributors of financial products would be required to implement reasonable controls to ensure products are distributed in line with issuers' expectations and to cooperate in the periodic product reviews conducted by issuers.

Who would the proposals affect?

The proposed design and distribution obligations would affect two classes of persons:

• Issuers – being anyone responsible for the obligations under the product, based on the definition of issuer under the Corporations Act 2001 (Cth); and

• Distributors – encompassing anyone that either:

  • arranges for the issue of a product; or

  • publishes a statement or advertisement that is likely to induce retail clients to acquire the product (such as an advertisement or a product disclosure document) and receives a benefit from the issuer of the product for engaging in that conduct or for the issue of the product (if the entity is not the issuer). 

However, distributors are not to include persons who provide personal financial product advice to retail clients.

The proposed product intervention power could potentially apply to a very wide range of individuals and businesses, including issuers and distributors of financial products.

The proposed regime would apply to both licensed and unlicensed issuers and distributors (so as to include persons acting under a licensing exemption or outside the definition of "financial service").

What financial products would be impacted?

The proposed design and distribution obligations would apply to all financial products made available to retail clients except ordinary shares.  The obligations would not apply to credit products (but would apply to margin loans).  It is proposed that ASIC be given broad exemption powers to exclude specified products from attracting the obligations, where appropriate.

On the other hand, it is proposed that the product intervention power be applicable to all financial products made available to retail clients, as well as credit products regulated by the National Consumer Credit Protection Act 2009 (Cth).

What are the proposed features of the design and distribution obligations?

What are the proposed features of the product intervention power?

It is proposed that ASIC will be empowered to intervene in relation to:

• financial products or specific features of financial products;
• the types of consumers who can access particular products; or
• the circumstances in which consumers access a financial product.

The possible interventions that are envisaged include requiring additional or amended disclosure to be provided to consumers, banning the product or its sale to a subset of consumers, warning statements or restrictions on advertising, or restrictions on product features.  The paper notes that ASIC could not intervene on matters which indirectly relate to a product, such as the remuneration payable to a distributor, because that is not a product feature.

ASIC would be able to make the interventions on a market-wide (or class) basis, or on an individual basis.

Exercising the power would require ASIC to firstly identify a risk of significant consumer detriment, consult with potentially affected parties, and consider alternative powers available to it.  The nature of any consultation would vary based on factors such as the scale of the intervention and the perceived urgency of it.

The duration of any intervention that is made is proposed to be limited to an 18 month period and in the case of market wide intervention, is subject to Parliamentary disallowance.  Individual interventions are also subject to administrative review.

It is proposed that the Government would review ASIC's use of the power after it has been in operation for five years.

What is the timeline for implementation?

It is proposed that the design and distribution obligations will begin to apply to new products issued six months after legislation for the reforms receives Royal Assent.  For products already available to consumers before that time, it is proposed that the products can continue to be offered without having to comply with the new obligations for a period of two years.  The product intervention power is proposed to commence on the day after the relevant legislation receives Royal Assent.  However, ASIC would consider whether a transitional arrangement is appropriate.

A time frame for implementation of six months after Royal Assent is very short as in that time, issuers and distributors would need to build the models for assessment and compliance with the new requirements, determine target and non-target markets and agree on document controls which need to be implemented by distributors. 

Conclusion

The proposed reforms, in particular the design and distribution obligations, have potentially far-reaching implications for financial services providers to retail clients.  Participants in this sector will need to consider how the proposed reforms might affect their business, and as they progress through the consultation stage, develop internal frameworks for ensuring compliance.