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What You Need To Know

  • The Final Report of the Financial System Inquiry recommended that ASIC should be provided with a proactive product intervention power.
  • Peter Kell, ASIC deputy chairman, has stated that such powers would be an important tool for ASIC to encourage better market outcomes.
  • The UK's FCA has already been provided with product intervention powers. We discuss below some learnings from the UK experience.

What You Need To Do

  • If you have any questions about these proposed product intervention powers, or how similar powers have been used by the FCA in the UK, please contact us.

Peter Kell, ASIC deputy chairman, has recently spoken in favour of a broad product intervention power to "enable ASIC to be more proactive and allow for moretargeted and timely intervention". This reflects the recommendation in the recent Final Report of the Financial System Inquiry (FSI Report) that a proactive product intervention power be introduced that would enhance the regulatory toolkit available to ASIC where there is a risk of significant consumer detriment.

Why Does ASIC Want Product Intervention Powers?

ASIC can currently only take enforcement action against conduct causing consumer detriment on an issuer by issuer basis and only after a breach or suspected breach of the law by the issuer. The FSI Report recommends that ASIC be equipped with a new power to take a more proactive approach, to be used as a pre-emptive measure when there is significant risk of detriment to a class of consumers. The powers would likely be available to target a particular product of a particular provider, or a class of products across a class of providers.

The UK Precedent

Product intervention powers, if granted, would likely be similar to those that have already been given to the UK's FCA and indeed the FSI Report specifically refers to the UK regime when making its recommendations in this area.

The FCA's product intervention powers allow it to:

  • make temporary product intervention rules with immediate effect, where it considers it expedient to meet its consumer protection objective or its competition objective. This allows the FCA to block the launch of a product or service or to prohibit an existing product or service; and
  • make rules relating to the unenforceability of contracts that are in breach of its product intervention rules. These rules might, for example, stipulate that such contracts are void and consumers will be entitled to recover payments made under them.

What Products Could Potentially be Affected?

We expect that ASIC would be granted powers which could be used to intervene in any regulated financial product, not just complex or highly structured products.

Given ASIC's recent heightened interest in margin FX and CFDs for retail clients one might reasonably foresee product intervention powers being used in respect of products such as these if such powers were introduced here.

Another segment of the market which could attract specific attention is hybrid securities, as has been the recent UK experience. Hybrids are a common form of instrument issued by listed Australian banks which combine elements of debt securities and equity securities. In 2014, the FCA used its product intervention powers to restrict firms from distributing contingent convertible securities (CoCos) to retail investors. The FCA describes CoCos as risky and highly complex particularly in relation to how CoCos can be written off (in part or entirely) or converted into equity when an issuer’s capital position falls. Like the FCA, ASIC has described these products as complex; however, any move by ASIC to use product intervention powers in this segment of the market would likely be seen to be highly controversial.

The Impact

In the era of rapid technological innovation, when new products are frequently being brought to market, product intervention powers could give ASIC the ability to delay the introduction of new products to market while it takes the time to assess the risk to consumers and the appropriateness of the existing regulatory regime in light of the new product. ASIC would likely need significant resources to enable its staff to undertake the analysis necessary to determine whether a product should be stopped or suspended, and on what basis.

We consider it is inevitable that product intervention powers will find their way to Australia. It is a question of "when" rather than "if".

Key Contacts

We bring together lawyers of the highest calibre with the technical knowledge, industry experience and regional know-how to provide the incisive advice our clients need.

This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.

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