As noted in our update on 11 February, following the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, one of the 'Additional Government Actions', pledged was to go beyond what was proposed in the Hayne Report and to extend the design and distribution and product intervention powers to 'both NCCP Act products and ASIC Act products', as was previously submitted by ASIC.
True to its pledge, the Federal government has now passed legislation that makes all ASIC products (in addition to the Corporations Act and Credit Act products that already were to varying degrees) subject to both the Design and Distribution Obligations (DDO) and Product Intervention Powers (PIP).
The response has been swift, even though the Government had also initially stated that it recognises the 'significant impact on many businesses' and that it 'will carefully consider how these reforms are implemented'. The Bill passed both houses on 3 April 2019 and came into effect on Royal Assent within two days on 5 April.
The PIP will commence immediately (i.e., the day after assent).
The DDOs will commence two years from assent.
Application to regulated credit
Because all ASIC regulated credit has been picked up, limitations that may have applied within the Credit Act and Credit Code are not necessarily relevant (such as credit predominantly for consumer purposes or exclusions such as short term credit and many others). It would appear that the 'retail client' definition under the Corporations Act will be used to distinguish which product/customer type are subject to this regime. This may impact credit products issued to businesses that are not wholesale clients which were previously outside this regime.
However we also consider it likely that regulations will limit the ambit of these new provisions to credit not covered by the Credit Act, as this approach would be consistent with footnotes that remain in the revised Explanatory Statement that DDO does not apply to regulated credit products due to the enhanced regulatory environment for those products. In addition, amendments to the National Consumer Credit Protection Act in the new act in relation to PIP were passed unchanged, even though the broader credit facilities under the ASIC Act can now be dealt with under the Corporations Act.
Product Intervention Powers
Aside from widening its breadth to all ASIC Act products, these provisions are otherwise largely unchanged by the earlier draft. They generally give ASIC power to issue a "product intervention order" if it is satisfied that a financial product or a credit product "has resulted in or will, or is likely to, result in significant detriment" to retail clients or consumers (as applicable).
Design and Distribution Obligations
Under the DDO, issuers are required to prepare a target market determination for each product to be used by distributors to ensure appropriate retail customers are targeted for sale of their product. Issuers must use reasonable steps to ensure products are being issued consistent with the determination. Distributors must likewise take reasonable steps that will, or are reasonably likely to, result in product distribution consistent with the determination.
A target market determination must be in writing, freely available to the pubic, and generally include:
- a description of the class of retail clients that are the target customer for the product;
- conditions and restrictions on distribution;
- matters that relate to when the determination is to be reviewed and/or will no longer apply.
Other amendments made in the final form of the new legislation include a further (and broader) private cause of action where an entity fails to prepare a determination and the retail client suffers loss. Previously it seems that a cause only arose if the product was distributed inconsistently with the determination.
ASIC also can seek orders for loss or damage to non-party consumers for contravention of these provisions.
If you are a provider (or distributor) of any retail financial product, which now includes regulated or unregulated credit, we encourage you to contact us to discuss how this may apply to you or your products and what immediate steps you could look to take or begin to implement in anticipation of either the PIP or the upcoming DDO.