Introductory Info
Date introduced: 20 September 2018
House: House of Representatives
Portfolio: Treasury
Commencement: Sections 1-3 on Royal Assent; Schedule 2 on the day after Royal Assent and Schedule 1, two years after Royal Assent.
The Bills Digest at a glance
Purpose of the Bill
The purpose of the Treasury Laws Amendment (Design and
Distribution Obligations and Product Intervention Powers) Bill 2018 (the Bill)
is to:
Design and distribution obligations
The new obligations apply to offers of financial products
that require disclosure under the Corporations Act. This includes
products that require disclosure to investors, for instance by way of product
disclosure statements, although there are some specific exclusions.
The design obligations which are imposed upon the
person who is responsible for preparing the disclosure document require that
person to:
- make
a determination in relation to the target market for the product
- review
the target market determination to ensure it remains appropriate
- keep
a record of the person’s decisions in relation to the new regime and
- notify
ASIC of any significant dealings in a product that is not consistent with the
target market determination for that product.
The distribution obligations require that a
distributor of financial products does not:
- engage
in dealing, providing financial product advice, giving a product disclosure
document, or making a recognised offer, to a retail client in relation to a
product unless a target market determination has been made and
- engage
in retail product distribution conduct where the target market determination
may no longer be appropriate.
The distribution obligations require that person to:
- take
reasonable steps so that retail product distribution conduct is consistent with
the target market determination
- collect
information specified by the issuer, and complaints related to the distribution
of a product, and provide them to the issuer and
- notify
the issuer of a product of any significant dealings in the product that are not
consistent with the product’s target market determination.
Product intervention powers
The amendments give ASIC a product intervention power for
both financial products and credit products where there is a risk of
significant consumer detriment.
Purpose of
the Bill
The purpose of the Treasury Laws Amendment (Design and
Distribution Obligations and Product Intervention Powers) Bill 2018 (the Bill)
is to:
Structure
of the Bill
The Bill has two Schedules:
- Schedule
1 sets out the amendments to the Corporations Act necessary to introduce
design and distribution obligations in relation to financial products and
- Part
1 of Schedule 2 sets out the amendments to the Corporations Act and the Consumer
Credit Act to insert a product intervention power; Part 2 of Schedule 2
contains consequential amendments to the Australian
Securities and Investments Commission Act 2001 (ASIC Act).
Background
Measure 1—design
and distribution obligations
The final report of the 2014 Financial System
Inquiry (FSI) made a number of recommendations to improve the financial
system in order to better meet the needs of individual Australians.[1]
Relevant to this Bills Digest, the FSI recognised that the
current framework relies heavily on disclosure, financial advice and financial
literacy. However, disclosure can be ineffective. Consumers may not seek advice
at all, or may receive poor-quality advice:
Many products are also distributed directly to consumers.
Such issues have contributed to consumer detriment from
financial investment failures, such as Storm Financial, Opes Prime, Westpoint,
agribusiness schemes and unlisted debentures, which have affected more than
80,000 consumers. Losses from these failures totalled more than $5 billion, or
$4 billion after compensation and liquidator recoveries.[2]
According to the FSI, ‘poor product design and
distribution practices that disregarded consumer behavioural biases and
information imbalances’ played a significant role in causing those losses.[3]
ASIC report
In making its recommendations, the FSI took note of,
amongst other things, a January 2014 report by the ASIC entitled Regulating
Complex Products.[4]
That report sets out the problem to be addressed as follows:
Being more complex does not necessarily mean that a product
is more risky. Likewise, a product could be relatively simple for an investor
to understand, in terms of its features and structure, but still pose a high
degree of risk. However, complexity can make it more difficult for investors to
evaluate the level of risk posed by a financial product, and decide whether
they are prepared to tolerate it, given the expected returns.[5]
Options
Accordingly, the FSI took the view that the framework
should promote the targeting of products to those consumers who would benefit
from them and that this would reduce the incidence of consumers buying products
that do not match their needs. To this end the FSI considered three options:
1. introduce a targeted product design and distribution obligation
2. introduce individual appropriateness test at point of sale for complex
products and
3. implement a new obligation through a fully self-regulatory approach by
setting expectations for industry and monitoring their progress, with regulatory
follow-up if progress is not made.[6]
The FSI’s preferred option was option 1,[7]
on the grounds that it would ‘deliver benefits to industry, including
strengthening internal risk management for product design’.[8]
The amendments in Schedule 1 of the Bill implement this
proposal.
Measure 2—product
intervention powers
Rectifying
consumer detriment
Currently, ASIC can only take action to rectify consumer
detriment after a breach or suspected breach of the law by a firm. In addition,
it can only take enforcement action against conduct causing consumer detriment
on a firm-by-firm basis, even where the problem is industry-wide. Australia has
had cases of significant consumer detriment where there was no basis upon which
ASIC could take enforcement action.[9]
These include:
- mortgage
managed investment schemes (MISs), where close to 100 were frozen in the market
downturn during the global financial crisis.[10]
In that case, many consumers did not expect an investment of this type to be
illiquid[11]
- unlisted
debenture investments, such as Banksia Securities, where many consumers thought
the products they bought were equivalent to bank term deposits.[12]
Responding
to emerging risks
In addition, there have been cases where ASIC lacked the
authority to respond effectively and in a timely way to an emerging risk of
consumer detriment.[13]
For example:
- agribusiness
schemes, where the product did not perform in the way that consumers were led
to believe, including schemes relying on ongoing sales to fund their
operations. Many consumers did not understand the potential risk of borrowing
to invest in these products.[14]
In total, more than 65,000 consumers invested and lost close to $3 billion[15]
and
- financial
collapses that involved poor distribution practices, such as Storm Financial
and Opes Prime.[16]
More than 3,000 consumers lost more than $1.4 billion, of which around half was
recovered.[17]
The FSI recognised that consumer confusion may arise even
where financial products are not complex. It opined that ‘targeted early
intervention would be more effective in reducing harm to consumers than waiting
until detriment has occurred’.[18]
Options
Again, in response to the identified problem, the FSI
considered three options:
1. introduce a product intervention power
2. introduce default products for a range of basic financial needs; for
example, deposits, home and contents insurance and basic investments and
3. prohibit distribution of certain classes of non-mainstream products to
retail consumers.
The FSI’s preferred option was option 1,[19]
on the grounds that it would ‘reduce consumer detriment and rebuild consumer
confidence and trust in the financial system in the longer term’.[20]
The amendments in Schedule 2 of the Bill implement this
proposal.
Government
response
The Government released its response to the FSI in October
2015 and committed to strengthen APRA’s regulatory framework to increase
financial sector resilience:
Australia’s financial sector regulatory framework needs to be
stronger than those of comparable economies. The resilience measures will
ensure the banking system is more stable by holding more capital, and will
address risk weights, leverage, loss absorbency and regulators’ crisis
management powers.[21]
On 13 December 2016, the Minister for Revenue and
Financial Services, Kelly O’Dwyer, announced that consultation would commence
to provide stakeholders with an indication of how these two measures could
operate in practice and that the Government would:
... undertake extensive consultation on the proposals to ensure
the final policy strikes the right balance between increasing consumer
protections without imposing an undue burden on industry or stifling
innovation.[22]
Consultation
The consultation process took place in three stages:
- first,
a proposals paper sought feedback on the implementation of the two measures
arising from recommendations 21 and 22 of the FSI.[23]
The purpose of the proposals paper was to outline proposals to illustrate how
the measures could operate in practice
- second,
an exposure draft of the proposed legislation was circulated for comment.[24]
This occurred from 21 December 2017 to 9 February 2018[25]
and
- finally,
a revised exposure draft of the proposed legislation was circulated for
comment.[26]
This occurred from 18 July 2018 to 15 August 2018.[27]
The provisions of the Bill as introduced are somewhat
different to those in the exposure draft. Where those differences are
significant they will be highlighted under the heading ‘Key issues and
provisions’ below.
Royal
Commission
The Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry was established on 14 December
2017.[28]
In his interim report of 28 September 2018, Commissioner Hayne acknowledged
that legislation which would improve the design and distribution of financial
products had been introduced recognising that ‘current disclosure requirements
are not, on their own, sufficient to fully inform consumers’.[29]
Committee
consideration
Senate
Standing Committee on Economics
On 20 September 2018 the Bill was referred to the Senate
Standing Committee on Economics (Economics Committee) for inquiry and report by
9 November 2018.[30]
The Economics Committee received 19 submissions.
The Economics Committee published its report on 9 November
2018.[31]
The report recommended that the Bill be passed.[32]
However, the Australian Labor Party (Labor) Senators on
the Economics Committee made additional comments noting that a number of issues
had been raised during the inquiry process as follows:
- in
relation to the design and distribution obligations:
- calls
to extend the obligations to all products regulated by the ASIC Act[33]
- calls
to extend the obligations to credit products[34]
- need
to improve remedies[35]
- concerns
about non-target market determinations[36]
and
- in
relation to the product intervention powers:
- the
range of products covered[37]
- shortfalls
in consumer redress provisions[38]
and
- outsourcing
of the drafting of the legislation.[39]
The Labor Senators, whilst not disagreeing with the
overall recommendation that the Bill be passed, made the following additional
recommendations:
- amend
the Bill so that both design and distribution obligations and product
intervention powers apply to all financial products specified in the ASIC Act
- consider
amending the Bill so that design and distribution obligations apply to credit
products defined in the National Consumer Credit Protection Act
- amend
the Bill to provide a further private cause of action where an entity fails to
make a target market determination and
- amend
the Bill so that ASIC be given standing under the design and distribution
obligation regime to seek compensation on behalf of affected consumers who are
non-parties to the legal proceedings.[40]
Senate
Standing Committee for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills
Committee (Scrutiny of Bills Committee) commented on the Bill in its Scrutiny
Digest of 17 October 2018.[41]
The Committee’s concerns which relate to the use of delegation of legislative
power are discussed in detail under the heading ‘Key issues and provisions’
below.
Policy
position of non-government parties/independents
Labor’s Shadow Minister for Financial Services, Clare
O’Neil has expressed concern that the Bill ‘has been cast too narrowly’ in that
the design and distribution obligations do not extend to consumer credit—and in
particular to credit cards.[42]
Ms O’Neil noted that ASIC ‘has asked for buy
now, pay later providers to be included’ and that ‘a leading buy now, pay later
provider, Afterpay, has actually agreed that it should be brought within the
scope of this Bill ... yet the government has designed a Bill that specifically
carves them out’.[43]
Labor MP, Matt
Thistlethwaite, stated in relation to the Bill: ‘... it has been rushed,
including regarding the buy now, pay later providers and having a look at
whether or not they should be brought within the scope of the Bill’.[44]
Independents and Members of
minor parties had not made statements about the Bill at the time of writing
this Bills Digest.
Position of
major interest groups
Design and
distribution obligations
In relation to the design and distribution obligations, submitters
to Treasury in response to the revised exposure draft of the Bill supported the
intent of the Bill and gave it qualified support.[45]
Of the two measures set out in the Bill, the design and distribution
obligations are by far, the most contentious.
Some submitters pointed to certain products which they
considered should not be subject to the obligations.[46]
For instance, the Customer Owned Banking Association stated that it considered:
... absolutely no policy case has been made to extend [the design
and distribution obligations] to basic deposit products.
...the fundamental problem that the proposed [design and
distribution obligations] seek to address reflects adverse outcomes from large
scale financial investment failures, and poor advice, associated with complex
financial products—the adverse outcomes are not associated with basic deposit
products.[47]
ANZ agreed stating that some ‘deposit products are likely
to be suitable for such a wide target market that no meaningful distribution
conditions could be attached to them’.[48]
Insurers are generally concerned about how the requirement
for a target market determination will affect renewals of insurance contracts.[49]
Product intervention
powers
Submitters to Treasury were ‘broadly supportive’ of this
measure but expressed concern about certain aspects, such as the penalties to
be imposed[50]
and the method of determining the point at which the intervention power may be
triggered.[51]
Further
comments
Further comments by stakeholders in relation to specific
issues in both measures are canvassed under the heading ‘Key issues and
provisions’ below.
Financial
implications
According to the Explanatory Memorandum, the measures in
the Bill will have nil financial impact.[52]
However, in relation to the design and distribution
obligations, the Regulatory Impact Statement provides that ‘the increase in
annual compliance costs for the industry as a whole will amount to $94.7m’.[53]
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed
the Bill’s compatibility with the human rights and freedoms recognised or
declared in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[54]
Parliamentary
Joint Committee on Human Rights
In its report of 17 October 2018, the Parliamentary Joint
Committee on Human Rights noted that the Bill did not raise human rights
concerns.[55]
Schedule
1—key issues and provisions
Penalties
and offences in the Corporations Act
This Bill creates a range of new offences under subsection
1311(1) of the Corporations Act for failures to comply with the design
and distribution obligations. Failures to comply may also give rise to civil
penalties.
Updating penalties
The Australian Banking Association was critical of what it
described as ‘the indiscriminate application of criminal offence provisions for
all contraventions in the Bill’ on the grounds that this is not consistent with
long-standing Commonwealth policy on the framing of penalty provisions:[59]
While it is arguable that the more serious contraventions in
the package such as failing to make a target market determination could, due to
their capacity to cause widespread harm, justify a criminal sanction, this is
far less clear in relation to other provisions.[60]
On 19 October 2016, the Government established the ASIC
Enforcement Review Taskforce. The Taskforce was established in response to a
recommendation of the FSI.[61]
The Taskforce was asked to review the enforcement regime
available to ASIC and assess the suitability of the existing regulatory tools
ASIC uses to perform its functions. The Taskforce recommended, amongst other
things, that penalties for corporate and financial sector misconduct should be
strengthened.[62]
Accordingly, the Treasury
Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill
2018 (the Penalties Bill) was introduced into the House of Representatives
on 24 October 2018. The purpose of the Penalties Bill is to introduce a
stronger penalty framework including, amongst other things, by updating the
maximum penalties for certain offences in ASIC administered legislation.[63]
At the time of writing this Bills Digest the Penalties Bill had been debated in
the House of Representatives, introduced into the Senate but not been the
subject of debate in that Chamber.
In the House of Representatives, Milton Dick indicated
Labor’s broad support for the Penalties Bill stating:
This is a necessary reform. This will help to prevent the
outrageous situation that we currently have where companies can make hundreds
of millions of dollars, even billions of dollars, through breaking the law and
then pay minuscule penalties. This current system is unjust and goes against
community expectations of how our corporate sector operates.[64]
Importantly the relevant penalties imposed in this Bill
are consistent with those proposed by the Penalties Bill.
Nature of
the design and distribution obligations
Making a target
market determination
Item 5 in Schedule 1 to the Bill inserts proposed
Part 7.8A—Design and distribution requirements relating to financial
products for retail clients into the Corporations Act. Within new
Part 7.8A, proposed section 994B relates to the making of a target
market determination. This is the first of the design obligations.
The Corporations Act already imposes disclosure
obligations on certain elements of the financial services sector. As a general
rule, a public company offering securities for sale (for example, shares
or debentures) must provide a disclosure document to potential investors[65]
by way of:
- a prospectus
- an offer
information statement
- a profile
statement and
- a two-part
simple corporate bonds prospectus.[66]
Offerors are persons such as insurers and asset
managers.
In addition, the Corporations Act requires a Product
Disclosure Statement (PDS) to be prepared by, or on behalf of, the issuer
or seller of the financial product.[67]
A PDS must contain sufficient information so that a retail client may make an
informed decision about whether to purchase a financial product.[68]
Proposed subsection 994B(1) of the Corporations
Act requires those persons who must give a disclosure document or provide a
PDS to also make a target market determination. Regulations may
specify another person who is to make a target market determination
for a product.
According to the Explanatory Memorandum to Bill:
The design obligations are imposed on the person who is
responsible for developing the financial product. This is the person who is
responsible for preparing the disclosure document.[69]
What is excluded
There are some exceptions to this rule. Proposed subsection
994(3) of the Corporations Act provides that the requirement for a
target market determination does not apply to:
- a
MySuper product[70]
- a
margin lending facility[71]
- a
security that has been or will be issued under an employee share scheme
- a
fully paid ordinary share in a company or a foreign company (with some specific
exceptions) or
- a
financial product issued, or offered for regulated sale, by an exempt
body[72]
or an exempt public authority.[73]
In addition, regulations may also prescribe a financial
product which is exempt from the requirement for a target market
determination.
The exclusion of defined benefit interests from the
requirement for a target market determination will no doubt ease the concerns
of UniSuper, which has consistently argued that defined benefit superannuation
schemes should be excluded from the design and distribution obligations. UniSuper’s
position is that such schemes are ‘quite different to retail financial products
and need to be treated equivalently to other default superannuation products
such as MySuper’ which have been exempted from the obligations.[75]
Nevertheless it is unclear why products such as MySuper
will be exempted by the operation of the Bill whilst defined benefit funds will
be exempted by regulation.
There have been calls from some submitters to also exclude
hybrid securities from the design and distributions obligations.[76]
The Australian Banking Association explained the perceived problem as follows:
Each bank, as an APRA regulated entity is required to issue a
certain amount of regulatory capital in the form of additional Tier 1 and Tier 2
securities (known as ‘hybrid securities’) and common equity (that is, ordinary
shares) in order to safeguard depositors and promote financial services system
stability. The structure, terms and features of hybrid securities are designed
in compliance with APRA’s prudential standards for additional tier 1 or Tier 2
capital. There is little flexibility to change product features to accommodate
issuer or investor preference. In recent years the ASX-listed market has been
an important source of additional Tier 1 and Tier 2 capital raising for the
Australian banks. Potentially restricting the target market for issuance of
hybrid securities, could impact the ability of the banks to comply with their
regulatory capital requirements.[77]
However, they have not been excluded either in the Bill
itself or by the draft regulations. The Regulatory Impact Statement gives some
explanation for the inclusion of hybrid securities in the design and
distributions regime—that is, some consumers acquire structured products that
are riskier than they realise and some firms distributing hybrid securities
include sales information in addition to, or inconsistent with, the information
in the prospectus. ‘This information tended to emphasise high yield while
downplaying risk’.[78]
Use of delegated legislation
ASIC is empowered by proposed section 994L to:
- make
notifiable instruments[79]
which would exempt a specified person or financial product from all or
specified provisions of new Part 7.8A, or to declare that Part 7.8A
applies to a specified person or financial product as if provisions of that
Part were omitted, modified or varied[80]
and
- make
legislative instruments[81]
which would exempt a specified class of persons or financial products from all
or specified provisions of new Part 7.8A, or to declare that Part 7.8A
applies to a specified class of persons or financial products as if provisions
of that Part were omitted, modified or varied.[82]
Scrutiny of
Bills Committee
The Scrutiny of Bills Committee was highly critical of the
use of delegated legislation stating:
The Committee will also have concerns about provisions that
enable delegated legislation to exempt persons or entities from the operation
of primary legislation, particularly where such provisions permit exemptions or
modifications that apply to a broad range of entities or legislative
provisions. This is because provisions of this kind may have the effect of
limiting, or in some cases removing, parliamentary scrutiny.[83]
That said, the Committee considered the rationale for the
use of delegated legislation set out in the Explanatory Memorandum to the Bill.
However the Scrutiny of Bills Committee remained unpersuaded stating:
The Committee notes that the proposed powers are intended to
ensure that ASIC is able to tailor the operation of the new design and design
and distribution regime so as to avoid any unintended consequences. However,
the Committee notes that it does not generally consider administrative
flexibility, or consistency with other legislation, to be sufficient
justification for broad delegations of legislative power (such as the power for
delegated legislation to modify the operation of primary legislation). The
Committee is also concerned that the Bill does not appear to set any limitation
on ASIC's powers of modification and exemption. For example, the Bill does not
set out any conditions that must be satisfied before such powers are exercised.[84]
Key issue—extent
of regulatory capture
In the context of the comments by the Scrutiny of Bills
Committee it is understandable that some submitters are concerned about whether
they will be required to prepare a target market determination for all or only some
of the products they offer. For instance, Allianz Australia Insurance Limited
(Allianz) notes that a PDS is required for general insurance products.[85]
That being the case, under proposed paragraph 994B(1)(b) a target market
determination must be made.
However, uncertainty arises for insurers where there are a
number of different covers within a single contract. In that case, the PDS
requirements are typically considered to only apply to the retail cover part of
the contract, not the whole contract. According to Allianz:
Clarification is required as to the intent in relation to
these policies. It is not clear whether the intent is for the TMD obligations to
apply to all covers that is, the retail and non-retail covers.
If both, insurers will need to create separate offerings ie offer
retail covers separately from the wholesale covers. This would require
extensive and very costly modifications to systems resulting in substantial
costs to the insurer and complexity for consumers. In addition, purchasing the
component covers separately could further increase the cost to customers.[86]
ANZ was also concerned about the extent of regulatory capture.
It questioned the rationale for extending the requirement for a target market
determination to products such as basic deposit products—on the grounds that
‘simple deposit products are likely to be suitable for such a wide target
market that no meaningful distribution conditions could be attached to them’.[87]
Similarly the Australian Institute of Superannuation
Trustees (AIST) is concerned that the Bill does not cover all the key entities
which create and distribute products. That is, ‘investment management companies
and product providers, which in turn provide information to platforms’ are exempted
from ensuring that the products they develop and sell are suitable.[88]
When a
determination is to be made
The Bill introduces the term retail product distribution
conduct in relation to a financial product. This includes any of the
following:
- dealing
in the product in relation to a retail client[89]
- giving
a disclosure document in relation to an offer of the product to a retail client
- giving
a PDS for the product to a retail client or
- providing
financial product advice in relation to the product to a retail client.[90]
A target market determination for a financial product must
be made before there is retail product distribution conduct (as set out
above) in relation to the product.[91]
In the alternative, where a regulation specifies that a person
who is specified in the regulations is to make a target market determination,
it must be made before the time or event specified in the regulation.
Where no time or event is specified, the target market determination must be
made before any person engages in retail product distribution conduct
in relation to the product.[92]
A failure to make a target market determination as above
gives rise to an offence. Item 9 of the Bill amends Schedule 3 of the Corporations
Act so that the maximum penalty is 200 penalty units or imprisonment for
five years, or both.[93]
Proposed subsection 994B(2) is also a civil penalty provision as
reflected in amendments made by item 8 of Schedule 1 to the Bill to the
table in subsection 1317E(1) of the Corporations Act.
Key
issue—when retail product distribution conduct occurs
A number of submitters to the Economics Committee have
drawn attention to the definition of retail product distribution conduct.
For instance Australian Super states:
It appears that the Bill is intended to apply to conduct that
occurs before a retail client acquires a financial product. The definition of
‘retail product distribution conduct’ may seem to have a broader application
however and potentially covers a range of activities that would normally and
legitimately transpire after a retail client has acquired a financial product.
This would include, for example, varying an interest in a financial product,
providing general advice or even a ‘refresher’ PDS to an existing
superannuation fund member.[94]
ANZ believes that there is a need for further clarity on
this matter.[95]
The Law Council of Australia also considers that there is a flaw in the
drafting of the definition:
The apparent error relates to the obligations concerning the
distribution of financial products ... As is suggested by the term
‘distribution’, the apparent policy intention is that the obligations will
apply to conduct occurring before a relevant financial product is acquired by a
retail client, but not to conduct occurring after the product has been acquired
by the retail client. This description of the apparent policy intention is
borne out by a review of the Explanatory Memorandum (EM), including the reference
at paragraph 1.80 of the EM to ‘potential investors’. However, as currently
drafted the Bill would give the distribution obligations an operation that
extends well beyond the apparent policy intention.[96]
In order to bring the drafting of the term retail
product distribution conduct into line with the policy intention, an
amendment would be required.
Contents of
the determination
Proposed subsection 994B(5) of the Corporations
Act lists the features of a target market determination for a financial product.[97]
The target market determination must be in writing.[98]
It must:
- set
out the class of retail clients in the target market[99]
- set
out any conditions on the distribution of the product (called a distribution
condition)[100]
- specify
the circumstances that are likely to trigger a review (called review
triggers) about whether the determination remains appropriate[101]
- specify
the maximum period from the day the determination is made to the day the first
review of the target market determination is to finish[102]
- specify
the maximum period from the day a review of a target market determination is
finished to the day that the next review of the determination is to
finish and
- specify:
- the
period within which complaints about a financial product are to be reported to the
issuer—referred to in this Bills Digest (but not in the Bill) as the complaints
reporting period[103]
- the
kinds of information needed by an issuer to identify whether a review trigger
or another event has occurred which would reasonably suggest that the target
market determination may no longer be appropriate—and the period within which that
information must be reported to the issuer.[104]
This Bills Digest (but not the Bill) refers to this as the other information
reporting period.
Importantly the complaints reporting period and the other
information reporting period are aligned to the record keeping and notification
requirements elsewhere in the Bill.
The first review and next review periods and the reporting
periods which are specified in the target market determination must be reasonable.[105]
In determining what is reasonable in that context the following
are to be considered:
- the
need to identify promptly whether an event has occurred which would reasonably
suggest that the determination is no longer appropriate and if so
- the
likelihood, nature and extent of detriment to retail clients if the target
market determination is not promptly reviewed.[106]
Determinations
must be appropriate
As stated above, a target market determination must be,
and must remain, appropriate. The appropriateness of a target
market determination is measured by whether it would be reasonable to conclude
that if the product were to be issued, or sold in a regulated sale:
- to
a retail client in accordance with the distribution conditions—it would be
likely that the retail client is in the target market and
- to
a retail client in the target market—it would likely be consistent with the
likely objects, financial situation and needs of the retail client.[107]
The Bill requires an issuer to make a target market
determination available to the public free of charge. A failure to do so gives
rise to an offence. Item 9 of Schedule 1 to the Bill amends
Schedule 3 of the Corporations Act so that the maximum penalty is 50
penalty units and/or imprisonment for 12 months.[108]
Proposed subsection 994B(9) is also a civil penalty provision.
Stakeholder
comments
To many submitters, the contents of the target market
determination were a cause for concern. For instance:
- National
Insurance Brokers Association (NIBA) considered that it is likely to be a large
document which if publicly available may reveal commercially sensitive
information[109]
and
- the
Financial Services Council (FSC) was also concerned about the amount of
information in the target market determination and requested that the matter be
revisited to determine ‘whether all of these items of information must be
included’[110]
- Allianz
stated that it is ‘unlikely that insurers will be able with any certainty, to
determine how they can reasonably describe the class of retail clients that
comprises the target market for the product’[111]
and
- ANZ
queried the wording of the explanation of the appropriateness of a target
market determination on the grounds that it could be interpreted as ‘requiring
consideration of the client’s actual objectives, financial situation and needs’.[112]
In hearings before the Economics Committee a
representative of the AIST suggested that the target market determination
should also include who was not in the target market:
A product manufacturer is required to say, “This product is
aimed at an expert investor who may have been trading in the market for some
years,” and, as a counterbalance, the product issuer should say, “If a person
is not experienced in financial trading, this product might not be
appropriate,” or “if a person has a low tolerance to risk, this product might
not being appropriate for them.”[113]
The drafting of the matters to be contained in the target
market determination is quite dense. It is not immediately clear to the reader
what the requirements mean. ASIC will need to ensure that adequate guidance
materials are provided to stakeholders to clarify their obligations.
Reviewing the
determination
Proposed
subsection 994C(1) of the Corporations Act authorises an issuer
to review the determination or make a new target market determination.
The second design obligation ‘is aimed at minimising the
distribution of products which may have an inappropriate target market
determination’.[114]
It requires an issuer to review a target market determination for a financial
product:
- during
a review period and
- when
a review trigger occurs.
The Bill introduces the new term review period being:[115]
- the
maximum period of time that elapses between the making of the determination and
finishing the first review and
- the
maximum period between completed reviews of a determination.
Under proposed subsection 994C(2)
of the Corporations Act an issuer must complete a review of a target
market determination for a financial product within the review period.
Reviews must also be carried out in response to review
triggers so that:
- issuers
are prohibited from engaging in retail product distribution conduct in relation
to the product, from as soon as practicable (but no later than ten business
days) after they knew or ought reasonably to have known that the determination
may be inappropriate, until they have reviewed the determination and, if
necessary, made a new determination[116]
- issuers
must, as soon as practicable but within ten business days, take reasonable
steps to ensure distributors are informed not to engage in retail product
distribution conduct in relation to the product unless the issuer has reviewed
the determination and, if necessary, made a new determination[117]
and
- a
distributor must, as soon as practicable but within ten business days, cease to
engage in retail product distribution conduct when such steps have been taken
by the issuer unless, after making all inquiries (if any) that are reasonable
in the circumstances, the person believes on reasonable grounds the
determination has been reviewed and remade (if necessary).[118]
Proposed subsections 994C(2) and (5) are
both offence and civil penalty provisions. Item 9 in Schedule 1 to the
Bill amends Schedule 3 of the Corporations Act so that the maximum
penalty for breaching the offence provision in proposed subsection 994C(2) is
50 penalty units or imprisonment for 12 months or both; whilst the maximum
penalty for breaching the offence provision in proposed subsection 994C(5) is
200 penalty units or imprisonment for five years or both.
Proposed subsections 994C(3) and (6) are offence
provisions. Item 9 in Schedule 1 to the Bill amends Schedule 3 of the Corporations
Act so that the maximum penalty for a breach of proposed subsections
994C(3) and (6) is 200 penalty units or imprisonment for five years
or both.[119]
Proposed subsections 994C(4) and (7) of the Corporations
Act are civil penalty provisions only.[120]
Distribution
of financial products
The first of the distribution obligations is
contained in proposed section 994D of the Corporations Act which prohibits
a distributor from engaging in retail product distribution conduct in relation
to a product for which a target market determination has not been made. The
exceptions to this prohibition are:
- where
the distributor has made inquiries that are reasonable in the circumstances
and, after doing so, believes on reasonable grounds that a target market determination
has been made, or is not required or
- the
retail product distribution conduct is excluded conduct—that is
providing personal advice.[121]
A failure to comply with proposed section 994D is
an offence. Item 9 of Schedule 1 to the Bill amends Schedule 3 to the Corporations
Act so that the maximum penalty is 200 penalty units or imprisonment for
five years, or both. The section is also a civil penalty provision.
The second of the distribution obligations is
contained in proposed section 994E of the Corporations Act. That
section requires both an issuer[122]
and a distributor to take reasonable steps to ensure that the retail
product distribution conduct in respect of the product is consistent with the target
market determination.[123]
A failure to comply with this requirement is an offence. Item 9 of Schedule
1 to the Bill amends Schedule 3 to the Corporations Act so that the
maximum penalty is 200 penalty units or imprisonment for five years, or both. Proposed
subsections 994E(1) and (3) are also civil penalty provisions.[124]
Importantly, these distribution obligations do not apply
to persons giving personal advice.
Reasonable
steps
A decision about whether an issuer or distributor is taking
reasonable steps must take into account all relevant matters, including, but
not limited to:
- the
likelihood that retail product distribution conduct in relation to the
financial product is inconsistent with the determination
- the
nature and degree of harm that might result from an issue or regulated sale of
the financial product to retail clients who are not in the target market or that
is inconsistent with the determination and
- the
availability and suitability of ways to eliminate or minimise the likelihood
and the harm.[125]
This is an objective test. According to the Explanatory
Memorandum the requirement of reasonable steps is evidence of a risk management
approach which ‘ensures the obligation is scalable according to the risk
associated with an inappropriate distribution of a product and the
practicability of mitigating the risk’.[126]
Stakeholder
comments
In its submission to the Treasury consultation on the
draft of the Bill, law firm Minter Ellison expressed concern about the proposal
for product issuers and sellers to ensure the conduct of distributors is
consistent with target market determinations:
The proposed regime will have the effect of making issuers
responsible for the conduct of distributors, rendering the separate licensing
of distributors redundant. This risks returning the industry to the days when
distributors were agents of issuers. It undermines the best interest duties
recently imposed on personal advisers by the FOFA regime because its takes the
responsibility for determining suitability for clients away from advisers and
moves it to the product issuer.[127]
Record keeping
Proposed section 994F of the
Corporations Act sets out the record keeping obligations of
issuers, distributors and persons giving personal
advice.
Issuers must keep complete and accurate records of
the decisions which underpin the making of the target market determination and
the circumstances in which it is to be reviewed—and the reasons for those
decisions.[128]
The record keeping obligations for distributors also
apply to persons giving personal advice.[129]
The obligations apply if a target market determination has
been made for a financial product which is on offer or for sale to retail
clients and the distributor (or person giving personal advice) engages in retail
product distribution conduct in relation to the product. In that case, the distributor
or advisor must keep complete and accurate records of the following information
(called distribution information) in relation to the product:
- the
number of complaints about the product that he, or she, receives[130]
- the
reasonable steps he, or she, has taken to ensure consistency with the target
market determination[131]
- any
information that the distributor is required to report to the issuer as
specified in the target market determination under the terms of the
determination[132]
and
- the
dates on which the distributor made the relevant report.[133]
Proposed subsections 994F(4) and (5) of the
Corporations Act apply to distributors and persons giving personal advice during
the complaints reporting period or the other information reporting period. In each
case the distributor and/or advisor must provide information in writing to the issuer
as soon as practicable, but in any case within ten business days, after the end
of the relevant reporting period. The subsections require reporting of:
- for
complaints—the number of complaints and
- for
other information—the information acquired during the reporting period, even if
no information was acquired.
In addition, proposed subsection 994F(6) of the Corporations
Act imposes a requirement on a distributor and/or person giving personal
advice[134]
to provide a written report to the issuer about a significant dealing
in the product if the dealing is not consistent with the target market determination
as soon as practicable, and in any case within ten business days.
A failure to comply with each of the requirements in proposed
section 994F gives rise to an offence. Item 9 of Schedule 1 to the
Bill amends Schedule 3 to the Corporations Act so that the maximum
penalty is 50 penalty units or imprisonment for 12 months, or both. These are
also civil penalty provisions.[135]
Notify ASIC
of any significant dealings
Where an issuer becomes
aware of a significant dealing in a financial product which is
inconsistent with a target market determination the issuer must give written
notice to ASIC as soon as practicable, and in any case within ten business
days, after becoming so aware.[136]
A failure to comply with the requirement in proposed
section 994G gives rise to an offence. Item 9 of Schedule 1 to the
Bill amends Schedule 3 to the Corporations Act so that the maximum
penalty is 100 penalty units or imprisonment for two years, or both.[137]
This is also a civil penalty provision.[138]
Key issue—what
is a significant dealing
The Association of Financial Advisers (AFA) was of the
view that there is a ‘complete lack of clarity’ of what significant dealings
may involve. In its submission to Treasury, the AFA was unsure whether a
dealing should be regarded as significant based on the ‘number of
clients or the dollars involved’.[139]
According to the Explanatory Memorandum to the Bill:
The meaning of significant is intended to take its ordinary
meaning in the context of the new provision. Generally, this would require a
regulated person to inform an issuer of dealings that would be worthy of their
attention having regard to the object of the new regime and the issuer’s role
as the product’s designer. However, ultimately whether or not a dealing is
significant would be a matter to be determined in the circumstances of each
case.[140]
This obligation applies in relation to regulated persons
that provide personal advice, or engage in conduct associated with such advice,
in relation to the product. The obligation to report significant dealings is of
concern to Allianz:
Brokers providing personal advice are carved out from the
retail distribution conduct obligations. If this results in clients purchasing
products outside the [target market determination], it is not clear why such regulated
persons need to report this to an insurer. It can also give rise to conflicts
of interest and breaches of confidentiality if the information reported may not
be for the benefit of the customer.[141]
ASIC’s
powers
Information
to be provided to ASIC
Proposed section 994H(1) of the Corporations Act
provides that ASIC may make a written request for distribution information or
records about a financial product from an issuer, a distributor or a person
providing personal advice.
In that case, the issuer, distributor and/or advisor must
comply with the requirement either by the date specified in the request or in
the absence of a specified date, within ten business days after the day the
person is notified of the requirement.[142]
A failure to comply with a written request for information
or records by ASIC within the specified time gives rise to an offence.[143]
Item 9 of Schedule 1 to the Bill amends Schedule 3 to the Corporations
Act so that the maximum penalty is 100 penalty units or imprisonment for
two years, or both.[144]
This is also a civil penalty provision.[145]
Stop orders
Where ASIC is satisfied that a provision of proposed
sections 994B–994E of the Corporations Act has been contravened it
may order that specified conduct in relation to retail clients in respect of
the financial product must not be engaged in while the order is in force. The
order must be in writing and is not a legislative instrument.[146]
Once ASIC has served a stop order on a person he, or she,
must take all reasonable steps to ensure that other people who engage in
conduct to which the order applies are aware of the order.[147]
A person who has been served with a stop order or is aware of a stop order must
not engage in conduct that is contrary to the order.[148]
A failure to comply with a stop order gives rise to an offence. Item 9
of Schedule 1 to the Bill amends Schedule 3 to the Corporations Act so
that the maximum penalty is 100 penalty units or imprisonment for two years, or
both. This is also a civil penalty provision.[149]
The Bill requires ASIC to hold a hearing and provide a
reasonable opportunity to any interested person to make submissions before an
order is made. Where doing so may be prejudicial to the public interest, ASIC may
make an interim stop order which has effect for up to 21 days.[150]
Civil liability
The Bill provides that a person who
suffers loss or damage because of the design and distribution obligations may
recover that loss by civil action.[151]
Schedule
2—key issues and provisions
Amending
the Corporations Act
Part 1 of Schedule 2 to the Bill amends the Corporations
Act by inserting proposed Part 7.9A—Product intervention orders.[152]
The new Part sets out the framework for the making and enforcement of those
orders.
Part 7.1 of the Corporations Act lists those
products which are financial products for the purposes of Chapter 7—Financial
Services and Markets. Within Part 7.1, section 764A details specific things
that are financial products. Item 4 in Part 1 of Schedule 2 to the Bill
inserts proposed subsection 764A(3) into the Corporations Act to
allow regulations to declare that a product is a financial product for a
specified provision of Chapter 7.
The Corporations
Amendment (Design and Distribution Obligations and Product Intervention Powers)
Regulations 2018 in draft form (the Draft Regulations) which was circulated
on 23 October 2018 provides that each of the following is declared a
financial product for new Part 7.9A:
- a
funeral expenses policy
- an
extended warranty arrangement and
- a
short term credit contract.
The effect of the Draft Regulations is to bring entities such as payday lenders
which would generally be regulated under the Consumer Credit Act, under
the regulatory umbrella of new Part 7.9A of the Corporations Act by
effectively deeming that short term credit contracts are financial
products.
Making an
intervention order
Proposed section 1023D of the Corporations Act
applies if ASIC is satisfied that a financial product is, or is
likely to be, available for acquisition by issue, or for regulated sale, to
persons as retail clients and has resulted in, or will or is likely to result
in, significant detriment to retail clients.
For the purposes of proposed Part 7.9A, a financial
product is a facility through which, or through the acquisition of
which, a person makes a financial investment, manages financial risk or makes
non-cash payments.[153]
However, the term financial product does not include:
- a
financial product issued, or offered for regulated sale, by an exempt body or
an exempt public authority or
- a
financial product specified for that purpose in regulations.[154]
Where ASIC is satisfied that a financial product has
resulted in, or will or is likely to result in, significant detriment to
retail clients, it may order that a person must not engage in certain conduct
in relation to the product either entirely, or subject to conditions.[155]
In this case the order is not a legislative instrument.[156]
In addition, where ASIC is satisfied that a class of
financial products, has resulted in, or will or is likely to result in,
significant detriment to retail clients, it may order that a person must not engage
in certain conduct in relation to the class of products either entirely, or subject
to conditions.[157]
In this case the order is a legislative instrument. Item 10 of
Part 1 in Schedule 2 to the Bill inserts proposed subparagraph 1317(gdm)(i)
into the Corporations Act so that the decision to issue a product
intervention order in relation to a class of financial products is not
reviewable by the Administrative Appeals Tribunal (AAT).
Significant detriment
The following matters must be taken into account when
determining the question whether there is, or may be, significant detriment:
- the
nature and extent of the detriment
- the
actual or potential financial loss to retail clients resulting from the product
- the
impact that the detriment has had, or will or is likely to have, on retail
clients and
- any
other matter prescribed by regulations.[158]
According
to the Australian CFD and FX Forum ‘transparency in ASIC’s assessment [of what
constitutes significant detriment] is essential in order for the industry to
have a common and clear understanding of the circumstances in which ASIC may
exercise its product intervention powers’.[159] In its view ASIC should be required to take into account
whether the detriment was caused ‘by AFS licensees or by unlicensed’—generally
being offshore brokers.[160] In addition given the significant commercial impact that a
product intervention could cause, the Australian CFD and FX Forum considers
that ‘the scale of detriment should be measured against the threshold of
significant harm on a market wide basis and this should be explicitly reflected
in the legislation’.[161]
According to the Explanatory
Memorandum to the Bill:
This power can be used as a last resort or pre-emptive
measure where there is a risk of significant detriment to a class of consumers.
This power also enables intervention without a demonstrated or suspected breach
of the law. However, consistent with the FSI, ASIC is held to a high level of
accountability for its use, given the potential significant commercial impact
of this power.[162]
Despite this apparent assurance, the Australian Banking
Association has expressed concern that the concept of significant detriment
remains undefined:
In our view it should be made clear that significant
detriment is not present merely because a large number of consumers have
incurred an otherwise insignificant detriment. Further it should be clarified
that significant detriment does not extend to immunising customers from any
loss or realisation of risk where a product is operating within risk
parameters.[163]
Requirement for consultation
Before it makes a product
intervention order, ASIC must consult persons
who are reasonably likely to be affected by the proposed order and, for
APRA-regulated entities, APRA.[164]
Regulations may prescribe requirements for consultation. However, at the time
of writing this Bills Digest, the draft regulations in respect of the Bill do
not contain such requirements. ASIC will comply with the consultation
requirement if it makes the proposed order, or a description of the content
of the proposed order, available on its website and invites the public to
comment on the proposed order.[165]
Of concern to some submitters is that proposed
subsection 1023F(3) of the Corporations Act provides that ‘a failure
by ASIC to comply with the consultation requirements does not invalidate a
product intervention order’.[166]
It was suggested that ‘failure by ASIC to follow such a
process should void the intervention’ and that ASIC should ‘become liable for
damages to the entity if the intervention caused significant disruption to the entity’s
business and loss of profit’.[167]
Duration
As stated above, some product intervention orders will be
legislative instruments and others will not. Those that are, will commence on
the day after they are registered on the Federal Register of Legislation under
the Legislation
Act 2003, or a later day specified in the order. Those orders which are
not legislative instruments commence the day after they are published by ASIC
on its website, or a later day specified in
the order.[168]
Generally, a product intervention order remains in force for 18 months, or any
shorter period specified by the regulations or in the order itself.[169]
A product intervention order may be extended only
with the approval of the Minister—based on a report by ASIC given before the
order ceases to be in force.[170]
In that case ASIC may, by legislative instrument, declare that a product
intervention order remains in force until it is revoked or for a specified
period unless it is revoked earlier.[171]
Item 10 of Part 1 in Schedule 2 to the Bill inserts proposed
subparagraph 1317(gdm)(ii) into the Corporations Act so that the
decision is not reviewable by the AAT.
ASIC may amend a product intervention order that is
in force. However that power is subject to the following limitations:
- where
the Minister has approved an extension of a product intervention order, ASIC
cannot amend the order without the prior approval of the Minister
- an
amendment to a product intervention order must not have the effect of extending
the period it remains in force for longer than the maximum period.[172]
Item 10 of Part 1 in Schedule 2 to the Bill inserts
proposed subparagraph 1317(gdm)(iii) into the Corporations Act so
that a decision to amend a product intervention order is not reviewable by the
AAT if the order (and therefore the amendment) have been made by legislative
instrument. A decision to amend a product intervention order that is not a
legislative instrument may be reviewed by the AAT.
ASIC may revoke a product intervention order. Where
the Minister has made an order extending an order, ASIC must not revoke the
order without the approval of the Minister. In addition, the revocation of a
product intervention order that is a legislative instrument must be by
legislative instrument.[173]
Item 10 of Part 1 in Schedule 2 to the Bill inserts proposed
subparagraph 1317(gdm)(iv) into the Corporations Act so that a
decision to revoke a product intervention order is not reviewable by the AAT if
the order (and therefore the revocation) have been made by legislative
instrument. A decision to revoke a product intervention order that is not a
legislative instrument may be reviewed by the AAT.
Essentially then, a product intervention order, an
amendment to a product intervention order or the revocation of a product
intervention order is not reviewable by the AAT if that action is taken by way
of legislative instrument.
ASIC may remake
product intervention order which has ceased to be in force or has
been revoked. However this power is limited. ASIC may only take such action if
it considers that circumstances have materially changed since the order was
made or if the Minister approves.[174]
Item 9 in Part 1 of Schedule 2 to the Bill inserts proposed
subsection 1101J(2) into the Corporations Act to prevent the
Minister from delegating his or her powers to approve the extension, amendment,
revocation or remaking of a product intervention order.
Notification
requirements
The terms of a product intervention order may include:
- a
requirement that a specified person who has dealt in a financial product in
relation to a retail client or provided financial product advice to a retail
client in relation to a financial product to take reasonable steps to notify
the retail client of the terms of the order and any other matters specified in
regulations and
- specify
requirements for giving those notifications—for instance, the timing of the
notification.[175]
Stakeholder
comments
Some submitters were very concerned
that consultation would be public.
According to the Australian CFD and
FX Forum ‘consultation must be a private matter with no pre-exercise of the
product intervention power and must give the affected entity reasonable
opportunities to respond and to resolve problems identified by ASIC’.[176]
The Financial Services Council also
submitted that there ‘should be private consultation and a reasonable minimum
period of consultation in relation to use of product intervention power’. This
is, in its view, ‘essential to provide due process and procedural fairness and
for the consultation to be meaningful and effective’.[177]
Enforcement
of product intervention orders
Proposed subsection 1023P of the Corporations
Act creates offences for:
- engaging
in conduct contrary to a product intervention order that is in force in
relation to the person[178]
- a
failure to comply with a requirement in a product intervention order to take
reasonable steps to notify a retail client[179]
and
- a
failure to take all reasonable steps as soon as practicable to ensure that
other persons who engage in conduct to which the order applies are aware of the
order.[180]
However, it is a defence to the first two of the three
offences above if the product intervention order is not a legislative
instrument and the person was not aware, and could not reasonably have been
aware, of the order.[181]
The offences are also civil penalty provisions.[182]
Civil liability
Under proposed subsection 1023Q
of the Corporations Act, a person who suffers loss or damage because of
a contravention of an intervention order will be able to recover that loss or
damage by civil action.
Amending
the Consumer Credit Act
Part 1 of Schedule 2 to the Bill also amends the Consumer
Credit Act by inserting proposed Part 6-7A—Product intervention orders.[183]
The new Part sets out the framework for the making and enforcement of those
orders.
Proposed subsection 301D(1) of the Consumer
Credit Act empowers ASIC to made an order that a person must not engage in
specified conduct in relation to a credit product—being a credit
contract, mortgage, guarantee or consumer lease—either entirely or except in
accordance with conditions specified in the order if ASIC is satisfied that the
credit product (or proposed credit product) has resulted in, or will or is
likely to result in, significant detriment to consumers.
Significant
detriment
For the purposes of proposed Part 6-7A of the Consumer
Credit Act whether a credit product has or will result in significant
detriment to consumers is to be assessed having regard to:
- the
nature and extent of the detriment
- the
actual or potential financial loss to consumers resulting from the product
- the
impact that the detriment has had, or will or is likely to have, on consumers
and
- any
other matter prescribed by regulations.[186]
Key
issue—consumer leases
A consumer lease is a contract for the hire
of goods for a fixed term of greater than four months, where the consumer has
no contractual right or obligation to purchase the goods at the end of the
lease term. If there is a right or obligation to purchase the goods at the end
of the lease term (for example a sale of goods by instalments arrangement), the
contract is considered a credit contract.[187]
Under a consumer lease, consumers make rental payments to
the lessor, usually on a fortnightly basis, over a fixed term (typically of
between 12 and 48 months). Although under a consumer lease a consumer does not
have a contractual right or obligation to purchase the goods at the end of the
lease, in practice most lessors allow the consumer to either retain the goods
(or similar goods) at the end of the contract or gift the goods to a third
party, nominated by the consumer.[188]
In September 2015, ASIC published its report into the Cost
of consumer leases for household goods.
In relation to Centrelink recipients, ASIC made the
following findings:
- they were consistently charged rental payments of $50 a fortnight
or more. This is consistent with the 2013 findings of the review of Centrepay,
which found that the average amount consumers were paying for leases paid for
through Centrepay was about $76 a fortnight
- the total cost of leases for Centrelink recipients was
significantly higher than the highest cost of leases identified in an RMIT
market survey (which was the price at the 75th percentile) and
- they were not offered low-cost leases (even though they were
available more broadly in the market): the lowest fortnightly rental payment
charged to Centrelink recipients was $53 for a lease with a one-year term, and
$40 for a lease with a two-year term.[189]
The table below provides examples of high-cost leases
(one-year term) for Centrelink recipients.
Table 1: Lease costs for Centrelink recipients
| Product |
Retail price |
Fortnightly
rental
payment
|
Total cost |
Interest rate |
| 7 kg washing machine |
$700.00 |
$83.69 |
$2,175.94 |
292.18% |
| 5 kg dryer |
$345.00 |
$117.00 |
$3,042.00 |
884.34% |
| 253 L fridge |
$498.00 |
$65.00 |
$1,690.00 |
324.35% |
| 145 L chest freezer |
$319.00 |
$42.00 |
$1,092.00 |
327.65% |
ASIC, Cost
of consumer leases for household goods, Report 447, September 2015, p. 22
In January 2018, ASIC announced a package of regulatory outcomes against
Thorn's (Thorn Australia Pty Ltd's) consumer leasing businesses Radio Rentals,
RR and Rentlo Reinvented. The outcomes included $6.1 million in refunds to
customers and write-offs of default fees, and an additional $13.8 million in
customer refunds of excess lease payments.[190]
The amendments to the Consumer Credit Act will give ASIC an additional
power to issue a product intervention order where it determines that, amongst
other things, a consumer lease has, or will, result in significant detriment to
consumers.
Proposed subsections 301F–301N of the Consumer
Credit Act are in near equivalent terms as proposed subsections 1023F—1023N
of the Corporations Act as set out above—with references to financial
products in the Corporations Act substituted for references to credit
products in the Consumer Credit Act.
Enforcement
There are some differences in the enforcement provisions
to take into account the current drafting, including penalties, of the Consumer
Credit Act.
Proposed section 301P creates offences and civil
penalties separately. The following conduct gives rise to criminal offences:
- where
a person engages in conduct contrary to a product intervention order[191]
- where
a person required by a product intervention order to take reasonable steps to
notify a consumer fails to comply with the requirement[192]
and
- if
a product intervention order has been served on a person, the person does not
take all reasonable steps as soon as practicable to ensure that other persons
who engage in conduct to which the order applies are aware of the order.[193]
In each of the circumstances listed above, the maximum penalty
is 200 penalty units, or imprisonment for five years, or both.
The following are civil penalty provisions:
- where
a person engages in conduct contrary to a product intervention order that is in
force in relation to the person[194]
- where
a person required by a product intervention order to take reasonable steps to
notify a consumer fails to comply with the requirement[195]
and
- if
a product intervention order has been served on a person, the person fails to take
all reasonable steps to ensure that other persons who engage in conduct to
which the order applies are aware of the order.[196]
In each of the cases above the maximum civil penalty is 200
penalty units.
In addition, consistent with the amendments to the Corporations
Act which are detailed above:
- item
14 of Part 1 of Schedule 2 to the Bill inserts proposed subparagraphs
327(1)(d)(iii)–(v) into the Consumer Credit Act to ensure that
certain decisions about product intervention orders are not reviewable by the
AAT and
- item
15 of Part 1 of Schedule 2 to the Bill inserts proposed subsection
337(1A) into the Consumer Credit Act to prevent the Minister from
delegating his or her powers to approve the extension, amendment, revocation or
remaking of a product intervention order.
Importantly there is no equivalent to proposed
section 1023Q of the Corporations Act, which permits a person who
suffers loss or damage because of a contravention of a product intervention
order to recover that loss or damage by civil action. This is because Part 4-2
of the Consumer Credit Act contains arrangements for compensating
consumers for loss or damage.
Concluding comments
Design and
distribution obligations
The drafting of the new design and distribution
obligations in the Bill is, in some places, lacking in clarity and is not quite
consistent with the drafting style in the existing provisions of the Corporations
Act. It is fortunate that the Explanatory Memorandum provides a thorough
account of the provisions in the Bill.
This may well be because the Bill represents the first
time such obligations have been introduced in Australia. The tone of many
submissions reflects a sense that stakeholders do not know, in practical terms,
what a target market determination will look like, or what they will have to do
on a day to day basis to ensure that a target market determination that they
have made remains appropriate. Considerable work will need to be
done by ASIC to ensure that adequate guidance materials are available before
the Bill, when enacted, is due to commence.
The sense of uncertainty is not helped by the instrument making
powers in proposed section 994L of the Corporations Act. It is
possible for ASIC to exempt persons who are currently captured by the Bill or
include a class of persons who are not. Whilst the powers are positive in that
they give ASIC flexibility to make changes to the regulatory capture of the design
and distribution obligations where needed, they have the capacity to add
confusion to a complex and expensive regime.
Product
intervention power
The greatest concern for submitters in relation to the
product intervention power is the nature of the consultation in which ASIC
should engage before a product intervention order is made. Submitters want that
consultation to be private—so that they do not suffer reputational damage in
the event that no order is made. The drafting of proposed section 1023F
of the Corporations Act requires that ASIC not make a product
intervention order unless it has consulted with ‘persons who are reasonably
likely to be affected by a proposed order’ but does not impose any time limit
on that process.