Why is financial product design so important?

Commissioner Hayne has recommended that the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Power) Bill 2018 which is currently stalled in Parliament be extended to apply the Design and Distribution Obligations to National Credit Act products and ASIC Act products and the ASIC Product Intervention Powers be extended to apply to ASIC Act products which are not otherwise regulated by the Credit Act.

If passed in its current form the Bill will amend the Corporations Act and the Credit Act to introduce a product intervention power for ASIC to prevent or respond to significant consumer detriment in relation to both financial and credit products.

As the Royal Commission hearings made clear, disclosure documents are inadequate to protect persons against products which do not provide value to the customer, such as some types of insurance, but are sold as though they do.

The Commissioner’s recommendation specifically dealt with conflicts in the financial advice industry where ASIC would have the power to ban aspects of remuneration practices where there is a direct link between remuneration and distribution of the product.

He also noted ASIC has said that it intends to use its product intervention powers to intervene in the sale of low-value insurance products such as accidental death insurance if it remains concerned about consumer outcomes. He said ASIC should also consider whether it should intervene in the sale of accidental injury insurance or funeral insurance if it continues to hold concerns about consumer outcomes.

But Commissioner Hayne does not expect an extension of ASIC’s powers to be enough on its own.

He also recommended making the promises made in the Banking Code more meaningful – by introducing statutory consequences for breaching key provisions of the Code.

He went on to observe that:

“So important is it that a senior executive within the bank be accountable for the bank meeting the promises it makes to customers in respect of the products it sells or issues to them, that I consider that it is a responsibility that should be subject to the provisions of the Banking Executive Accountability Regime (BEAR).

There should be one person in the bank responsible for those tasks in respect of all the bank’s products. The person having responsibility for those tasks should be an ‘accountable person’ under section 37BA of the Banking Act 1959 (Cth) (the Banking Act); the ADI should have the accountability obligations specified in section 37C with respect to that person (and the accountable person, the obligations set out in section 37CA); and the key personnel of the ADI should have the obligations described in section 37D with respect to the accountable person.”

ASIC argued in submissions that financial services and credit providers are more likely to comply with specific objective requirements about permitted conduct than obligations that are expressed in more general terms.

It argues that if what constitutes compliance is contestable or ultimately can only be determined by litigation there is a risk that different providers will adopt different standards, and that some will take a minimalist approach to compliance.

The Royal Commission Final Report accepted that financial services laws should be simplified with no exceptions or carve-outs. Commissioner Hayne agreed that exceptions and limitations lead to uncertainty and different interpretations of the law. But he wants ASIC to enforce the laws.

The recent Senate Inquiry on financial hardship looked at consumer leases, small amount credit contracts, “buy now, pay later”, book up and debt management firms.

ASIC argued that an extension of its powers would allow it to take action against businesses which target Australians at risk of financial hardship with credit and financial products or services that are exploitative in their pricing or operation.

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