As part of its response to the Financial System Inquiry, the Australian Government introduced a product intervention power to enable ASIC to make a product intervention order when a financial product or credit product has resulted in significant financial detriment (see Pt 7.9A of the Corporations Act 2001 and Pt 6-7A of the National Consumer Credit Protection Act 2009).
In summary, the power enables ASIC to:
- Respond to problems in a flexible, targeted, effective and timely way;
- Take action on a market-wide basis (without the need to wait for law reform); and
- Without a demonstrated or suspected breach of the law, take action before significant detriment, or further detriment, is done to consumers (that is, deal with ‘first mover’ issues that may inhibit industry-led responses to products that cause significant consumer detriment).
To assist firms that issue or distribute financial or credit products, the Government has also introduced a new governance regime for the design and distribution of such products (see Pt 7.8A of the Corporations Act) – with these obligations to become effective from October 2021.
It is important to note that the scope of ASIC’s power is broad and extends also to the risk of significant consumer detriment which enables ASIC to exercise its power even when a firm is complying with the design and distribution obligations covered by the new governance regime.
Importantly, Regulatory Guide 272 provides that ASIC’s view towards the power is that it:
- Is not intended to be used for pre-approval of products – that is, just because the regulator has not intervened does not mean the product is a low-risk product;
- Is not designed or intended to prevent all monetary losses or eliminate risk from the financial markets; and
- Is not to be seen as a prudential tool which prevents product failures or firm collapse.
Rather, the purpose of the power enables ASIC to intervene in order to mitigate the significant detriment that can arise when consumers are marketed and sold investment products that are inappropriate for their risk profile or when they are unable to adequately understand and/or assess the risk present at the relevant time.
Products that may be subject to intervention
The products that may be subject to intervention are:
- Financial products regulated under the Corporations Act (being those products that are available for acquisition by retail clients by way of issue or are regulated sales of financial products including securities, interests in managed investment schemes, derivatives, insurance products, superannuation products and deposit-taking facilities);
- Credit products regulated under the National Credit Act (being a credit contract, mortgage, guarantee or consumer lease); and
- Financial products, as defined by the Australian Securities and Investments Act 2001 (being those products available for acquisition by retail clients by way of issue that attract broad general consumer protections such as prohibitions on misleading or deceptive conduct and unconscionable conduct).
Types of product intervention orders that can be made by ASIC
There are two types of orders that can be made:
- An individual product intervention order which applies to a specified person/s in relation to a product; or
- A market-wide product intervention order which applies to a person, in relation to a class of products.
ASIC has said it is more likely to intervene on an individual basis (for a specific product issued by a named firm) if the problem is specific to a particular entity or person. However, an individual order will not be considered to be a legislative instrument.
Whereas market-wide interventions order will apply across a class of products and will be considered to be legislative instruments. This type of order will only be appropriate where ASIC seeks to address a practice that is relatively widespread or there is risk the practice will be pheonixed or adopted by others.
Importantly, ASIC can make a product intervention order that a person not engage in specified conduct in relation to a product or class of products entirely or except in accordance with certain conditions.
Examples of interventions
- Order that a product (or class of products) only be offered by way of issue to specific classes of consumers;
- Order that a product (or class of products) only be offered by way of issue in specific circumstances—for example, through personal advice or through a deferred sales model;
- Order the amendment, restriction or banning of marketing, ‘choice architecture’, promotional and disclosure material relating to a product (or class of products);
- Order that a product (or class of products) not be distributed without prescribed improvements to the information provided to consumers;
- Order the amendment or banning of remuneration arrangements that are conditional on the achievement of objectives directly related to the product (or class of products)—for example, when remuneration is linked to product distribution;
- Order the banning of a feature of a product (or class of products), or order that the feature not be available unless it complies with specified criteria—for example, imposing leverage limits on a product (or class of products); or
- Order the banning of the issue of a product (or class of products).
Regulatory Guide 272 should be consulted for a more comprehensive overview of ASIC’s product intervention power.
This article was written by Alexandra White, Partner, Rebecca Jaffe, Partner and Hong-Viet Nguyen, Partner.