As the regulatory consequences of the Hayne Royal Commission continue to flow, ASIC is preparing to flex its new regulatory muscles in the form of its product intervention powers.
Those powers, which became law in April this year, enable ASIC to intervene on either a product-specific or market-wide basis when a financial product or credit product has resulted or is likely to result in significant detriment to consumers.
They were introduced following the recommendations of the Financial System Inquiry, and are designed to overcome the problem that, without powers of this kind, ASIC could only:
- take action to rectify significant consumer detriment after a breach or suspected breach of the law by a person; or
- take enforcement action against conduct causing significant consumer detriment on a firm-by-firm basis, even when the problem was industry-wide.1
Product intervention powers
ASIC’s powers are very flexible, and ASIC has indicated that product intervention orders could include:
- an outright ban on a particular product;
- prohibiting a product from including specific features, or imposing parameters on those features (such as maximum leverage ratios);
- banning or requiring the amendment of remuneration arrangements relating to the distribution of a product;
- imposing additional disclosure requirements on the distribution of a product; and
- restricting the class of consumers to which a product can be offered,
and these powers can be exercised over an entire class of products, as well as individual products.
ASIC is required to consult with affected parties before making a product intervention order, and orders have an initial duration of up to 18 months, which can be extended or made permanent by Ministerial order.
How will ASIC exercise the product intervention powers?
ASIC is cognisant that the product intervention powers require a careful balancing between consumer choice and consumer protection,2 and recognises that the powers are not intended to prevent all monetary losses or eliminate all risk from financial markets.3
However, the notion of “consumer detriment” which is the underlying basis for exercise of the powers, is to be interpreted broadly. Detriment could be financial in nature (such as actual financial loss for a consumer) but could also include non-financial harm, such as damage to a consumer’s credit rating, or where consumers are sold products that are misaligned with their needs or expectations.4
For example, ASIC cites the historical case of bank term deposit products which were advertised with attractive interest rates but without clear disclosure that following the term deposit’s initial maturity, it could be automatically rolled-over into a much lower interest rate deposit product. Had the product intervention powers been available to ASIC at that time, ASIC would likely have exercised them, perhaps to require far clearer disclosure of the rollover arrangements.5
The experience in overseas jurisdictions is also instructive: regulators in the USA, UK, European Union, Hong Kong and Taiwan already have product intervention powers. The UK’s Financial Conduct Authority has used these powers in relation to the sale of certain convertible securities and binary options to consumers, and the EU’s European Securities and Markets Authority (ESMA) used its powers in relation to Contracts for Difference (CFDs) and binary options. ESMA has indicated that its use of these powers is as a measure of last resort, and recognises the serious impact this can have on affected product issuers and distributors.6
Our press has already speculated that ASIC could have CFDs, binary options and certain insurance products in its sights as soon as August 2019.7
Where to from here?
ASIC is currently taking submissions on its draft regulatory guide relating to the new product intervention powers,8 and expects to publish the final regulatory guide in September 2019.
From there, we could see ASIC move swiftly to initiate the consultation process to implement its first product intervention orders.
Market participants offering or distributing exotic or high-risk products to retail clients in Australia would be well advised to monitor the position closely. As the example relating to term deposits also illustrates, any market participants dealing with retail clients at all need to be conscious of the potential reach of the new powers.
1. ASIC Consultation Paper 313, at paragraph 7.
2. ASIC Podcast, episode 50 (available at https://www.podbean.com/ew/pb-5we8x-b5daa7)
3. ASIC Consultation Paper 313, at paragraph 16.
4. ASIC Draft Regulatory Guide on Product Intervention power, at paragraphs RG000.40-RG000.41.
5. ASIC Consultation Paper 313, at paragraph 29.
6. ASIC Podcast, episode 50 (available at https://www.podbean.com/ew/pb-5we8x-b5daa7).
7. ASIC to ban toxic products from August, James Frost, Australian Financial Review, 26 June 2019.
8. ASIC Consultation Paper 313, June 2019.
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