Design and Distribution Obligations and Product Intervention Powers Bill revised

The Government has released for public consultation a revised exposure draft of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018. Background

Objectives

The Bill has two objectives:

  • to impose design and distribution obligations for financial products to ensure that products are targeted at the right people; and
  • to give ASIC a product intervention power for both financial products and credit products when there is a risk of significant consumer detriment.

The design and distribution obligations will apply to issuers or distributors and would be imposed at the stage of product design and distribution, and after the sale of the product to ensure that the upfront offer to the customer is matched by their post-sales experience.

Issuers and distributors of products will be required to establish processes and controls for ensuring products are designed with customer needs and understanding in mind and are marketed to the section of the population for whom they are useful and appropriate.

Changes to first draft Bill

The changes in the revised draft include:

  • The transitional provisions have been amended so that the obligations will apply to all financial products two years after the legislation receives Royal Assent (instead of one year).
  • provisions have been added to allow the regimes to cover additional products or exclude products. In particular, the provision that allows the coverage of additional products will allow the Government to act if a financial product is not currently regulated under the Corporations Act 2001 but is causing, will cause or is likely to cause significant consumer detriment.
  • At this stage, the Government is considering using the regulation-making power to allow ASIC to use the product intervention power with respect to funeral expenses insurance, certain extended warranties that are functionally equivalent to add-on insurance and short-term credit that is not regulated under the National Consumer Credit Protection Act 2009.
  • amendments so that the design and distribution obligations do not apply to fully paid foreign ordinary shares, but applies to unpaid ordinary shares.
  • amendments so that the design and distribution obligations do not apply to ordinary shares that are convertible to preference shares, as long as there is no intention to convert those shares within 12 months of the date of issue of those shares.
  • amendments so that a person subject to an intervention order only has to take ‘reasonable steps’ to notify retail clients of the order.
  • a provision has been added to clarify that the distribution conditions identified in a target market determination must be such that if followed, they would likely result in the product being distributed to the target market only.
  • A new term ‘retail product distribution conduct’ has been defined and the meaning of ‘dealing’ has been narrowed. The intended effect of these definitional changes is that regulated distribution activity (that is, activity that must be consistent with target market determinations) includes providing disclosure documents, providing general advice and dealing, does not include secondary sales of financial products, or other variations to or cancellations of financial products and only includes activity with respect to retail clients.
  • a provision has been added to clarify that the mere asking of information to determine if someone is in a target market and informing them that they are or are not, does not constitute personal advice.
  • amendments to allow consumers to commence a civil action for losses resulting from an issuer’s failure to notify, or a distributor failing to stop distributing when notification has occurred, in the event of a review being triggered.
  • increases in criminal penalties for consistency with the Corporations Act 2001.
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