Final Report and Government's response
Throughout the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, there were many references to the proposed Design and Distribution Obligations (DDO) and Product Intervention Power (PIP) for which legislation has recently been tabled (and then referred to the Economics Legislation Committee for inquiry and report) and regulations released for consultation, at the end of 2018.
However, the most significant mention of this proposed regime was not in Commissioner Hayne's Final Report or one of its 76 recommendations, but in the form of the 'Additional Government Actions' pledged on the very last page of the Government's formal response. Under the heading 'Additional measure — Extension of legislation for PIP/DDO', the Government states that it 'agrees with the Commissioner's suggestion to extend the proposed DDOs to both NCCP Act products and ASIC Act products and the ASIC PIP to apply to ASIC Act products'.
In our view, the Government's response does not accurately reflect Hayne's treatment of the proposed legislation, but rather directly echoes the submission by ASIC to extend its own powers in this way.
Will a new Government adopt a similar approach? And what will these changes mean if implemented?
Background to proposed scope of legislationThe proposed framework is stated to form part of the Government's response to the Financial System Inquiry (FSI) recommendations in 2015, to introduce:
- design and distribution obligations for financial products to ensure that products are targeted at the right people (FSI recommendation 21); and
- a temporary product intervention power for the Australian Securities and Investments Commission when there is a risk of significant consumer detriment (FSI recommendation 22).
There has been much discussion throughout the consultation process as to how far-reaching these new provisions should be. In their current form, the PIP generally extends to financial products under the Corporations Act and credit products under the National Consumer Credit Protection Act (Credit Act). ASIC has explicit powers to declare that particular 'things' that would otherwise have been exempt are financial products and therefore subject to PIP.
However the DDO only extend to financial products under the Corporations Act. According to the Explanatory Memorandum, the responsible lending obligations preclude the need to subject credit products regulated by the Credit Act to the DDO.
ASIC's submission for extended powersASIC's 2018 submission to Treasury went further, and called for its proposed PIP to also 'apply to all ASIC Act products', specifying the need for its additional power to extend to credit products that fell outside the regulation of the Credit Act. ASIC also sought to apply the DDO not only to ASIC Act products but also to all credit products under the Credit Act, dismissing the reasoning that existing responsible lending obligations were sufficient.
Initial response by RegulationsAt the time, it did not appear that ASIC's submission had gained any real traction, which was reflected in the exposure draft regulations released subsequently. These regulations extended the PIP framework, but only to particular products including funeral expense policies, extended warranties and short term credit contracts by declaring these 'things' to be treated as financial products and subject to the PIP. They clearly did not go as far as ASIC had submitted.
Royal Commission Final Report
In the Final Report itself, the references to the application of the DDO and PIP were generally quite high-level, without any real evidence that its impact or constructive arguments for extending its application, were considered in detail.
In the context of inappropriate advice and the management of conflicts, Hayne references the DDO and PIP but only as a blunt intervention measure where a direct link between remuneration and distribution is identified. They are further raised as a backdrop to the vertical integration discussion and as a further basis for no radical changes. They are also referenced in relation to specific financial products that should be included, with particular concern expressed for low value products and whether the proposed ASIC powers were well suited to them. The report (and recommendations) also call for regulation of 'funeral insurance' which the draft regulations already address.
In respect of extending the DDO and PIP to other classes of products, Hayne only states that 'It is not apparent why the powers should not extend, as ASIC has requested, to all financial products and credit products within ASIC’s regulatory responsibility'. Hayne raises, but does not answer, this question. And as extending the application of the DDO or PIP does not form part of any recommendation, it arguably is not yet fully considered and certainly not addressed in the Final Report.
Government's responseThe Government's 'additional action' to extend the framework to Credit Act and ASIC Act products appears to be predominantly based on ASICs request for additional powers, and not necessarily 'in agreement' with the Commissioner's recommendations as suggested. In particular, extending the DDO to regulated credit products already subject to responsible lending obligations is certainly an unexpected twist. This will be important to keep in mind as the DDO/PIP legislation progresses through parliament and any further changes are made.
It is still unclear in what form this extension will take, as the Government's response states that it recognises the 'significant impact on many businesses' and that it 'will carefully consider how these reforms are implemented'.
If you are provider of regulated credit or credit under the ASIC Act only, we encourage you to contact us to discuss how this may apply to you or your products.