1.1        Labor Senators are proud of Federal Labor's strong history in protecting consumers, particularly in the financial services sector. Given this bill does strengthen consumer protections in financial services, it has the support of Labor Senators.

1.2        However, the inquiry process demonstrated that there is a large gap between this Government's rhetoric on looking out for ordinary Australians and delivering legislation that matches that language.

1.3        The most concerning element is the degree to which the views of ASIC and the Government differ. ASIC's submission to this inquiry calls for a broader range of products to be covered in both the design and distribution obligations as well as the product intervention powers.

1.4        The Banking Royal Commission has shown there is a greater need for scrutiny of financial institutions; in particular, the way in which products are designed and sold to consumers. Consumers rightly expect to have adequate protections in place so they have confidence in our financial system.

1.5        Among consumers, there is growing demand for financial counselling and support, as well as calls for redress to be paid by financial institutions. This reinforces the importance of ensuring that financial products are appropriately targeted and regulated in the future.

1.6        It should not come as a surprise that a Government led by a Prime Minister who voted against setting up a Banking Royal Commission 26 times would seek to do the bare minimum in legislation while presenting a tough image in the media.

1.7        Labor Senators at the end of these additional comments will set out a number of amendments to the bill that will improve the level of consumer protections offered.

Issues raised through the inquiry process

Design and Distribution Obligations – calls to extend the obligations to all products regulated by the ASIC Act

1.8        A number of stakeholders set out support for extending coverage of the design and distribution obligations to all products regulated by the ASIC Act, which would pick up on products such as funeral expenses insurance, some extended warranties and certain buy now pay later arrangements.

1.9        ASIC argued that:

In ASIC's experience, these ASIC Act only products can at times be a source of significant detriment to consumers. With changes in technology, it is likely that further substitute products will develop.[1]

1.10      The Financial Services Council agreed with this in principle:

Yes, the position the FSC has taken is that there ought to be no reason why funeral expense insurance, for example, should not be treated as a financial product and therefore subject to the DDO and PIP regimes. So, in principle, we have no disagreement with extension to other products.[2]

1.11      Consumer groups also support this position:

...we recommend that the obligations apply to financial products as defined in the ASIC Act. Adopting the ASIC Act definition would ensure that the obligations apply to all retail financial and credit products, including buy now, pay later providers; funeral expenses insurance; and extended warranties.[3]

Design and Distribution Obligations – calls to extend the obligations to credit products

1.12      ASIC also argued that design and distribution obligations be applied to credit products under the National Consumer Credit Protection Act 2009:

The Bill's explanatory Memorandum explains that the reason for not applying these obligations to credit products is that such product are already subject to specific rules such as the responsible lending obligations.

As set out in the ED [Exposure Draft] submission, we consider that the responsible lending obligations and other consumer protections are not equivalent to, or an adequate substitute for, the proposed design and distribution obligations.

Whereas the new obligations focus on an entity having appropriate processes and controls in place for the design and distribution of a product, the responsible lending obligations are more limited to a focus on the immediate impact of a transaction [on] an individual consumer.[4]

1.13      Consumer advocates argued in a similar way:

As set out in our initial and supplementary submissions, we strongly support both regulated and unregulated credit being subject to the DADOs [design and distribution obligations]. This would be achieved by adopting the ASIC Act definition of 'financial product'. The Proposals Paper justified the exemption for regulated credit products on the basis that there is a 'potential overlap with the responsible lending obligations that already apply to credit products'. However, we reiterate that responsible lending obligations offer different (and lesser) protections to consumers than the DADOs.

Responsible lending obligations apply only at the point of sale and are limited to assessing whether a product is 'not unsuitable' for a consumer. In contrast, the DADOs would apply during product design, distribution and post-sale. The obligations would require firms to design safe and suitable credit products and distribute them accordingly—this would be an important additional protection for borrowers.[5]

1.14      The Australian Bankering Association did not support this recommendation:

I'll go to credit first if that's okay, in the context of the DDO. The first point is that we've always supported the product intervention power applying to credit and, indeed, the other products under the ASIC Act. But, in relation to the DDO on credit, we've developed our policy position based on the clear intention from the government that credit wasn't going to be subject to the DDO, and certainly the FSI's recommendation didn't extend there. If there were a proposal to expand the DDOs to credit, we imagine that there would be new legislation to amend the Credit Act, and we would consider that legislation in good faith. But I do note that the distribution of credit is very different to the current arrangements for financial products in that, when a credit product is sold, there's an individual suitability test at the point of sale and in relation to any credit limit increases. So the customer's actual circumstances are taken into account by the credit issuer and any intermediary as part of that process, which is different to what occurred with financial products. So we would consider it, but we think that we would need to be very mindful of the current consumer protection regimes that apply to credit.[6]

1.15      Treasury also offered its views on this issue:

Yes. The financial system inquiry recognised that there is an existing regime that applies to suitability in relation to credit products in the form of responsible lending obligations. Obviously it's not the same, but the regulatory goal of both of them is to assess whether a particular product is suitable for a consumer. Design and distribution obligations do that at the class level, and responsible lending obligations do that at the individual level—so if someone selling a credit product has to assess whether that product is not unsuitable for that individual person. It's a different way of doing it, yes, but it's the same regulatory goal.[7]

Design and Distribution Obligations—improving remedies

1.16      ASIC made two recommendations in their submission that pertain to remedies under the Design and Distribution Obligations:

We support the Bill providing private rights of action for most breaches of the design and distribution obligations. In our ED submission, we suggest that the regime could provide a further private cause of action where an entity fails to make a target market determination.

In addition, we have suggested that ASIC be given standing under the regime to seek compensation on behalf of affected consumers who are non-parties to the legal proceedings. This would be consistent with the existing provisions of the ASIC Act.[8]

 Design and Distribution Obligations—non-target market determinations

1.17      Industry Super Australia (ISA) expressed concerns about drafting changes between the last round of exposure draft legislation and the introduction of the current legislation into the Parliament. ISA argued that under the proposed legislation, there would be an incentive for target market determinations to be as broad as possible to minimise legal exposure and would reduce the effectiveness of the whole scheme:

Originally the discussion was that you would determine a target market and a non-target market. Determining a non-target market is quite important, because it actually is about determining who is vulnerable to mis-selling associated with that product. Speaking now not as ISA but personally, I used to do product suitability testing as part of my previous employment. If you define a target market and don't have a non-target market, the incentive is to define your target market as broadly as possible—virtually anybody that you can sell the product to. That means you don't run the risk of liability with a non-target market. When I've done product testing in the past, it has become quite a difficult conversation around what risks you're looking for in the non-target market and how you develop those flags. But they're really important ones, because they allow you to discover the types of people who have been mis-sold relatively quickly. But if you drop that out it becomes harder to locate those people through product testing.[9]

1.18      ASIC's view on this was the following:

I think that's an interesting issue. My understanding is the Treasury didn't want a situation where there was a definition of a target market and a definition of non-target market with a grey area in between, where people who didn't fit either of those two categories as described—what do the distributors do about them? I can understand that concern. I think that's real. That said, if you're just defining your target market, it seems to me that it's open and would be good practice in many cases to use both positive phrases and—for example, 'It includes these people but not these people.' Our consumer credit insurance product, which covers unemployment, has a target market that includes people who are employed. The obverse of that—and you can say that explicitly, as well—is that it certainly doesn't include people who are not employed and who cannot benefit from the coverage. It is still possible within the current regime—and I think our guidance might explore this—to use both positive statements of inclusion and statements of exclusion in how you go about defining the target market.[10]

1.19      Treasury offered this response to similar questioning:

In the first bill, it was a target market determination so there was never a non-target market in the first bill. It is fair to say to that idea of a non-target market wasn't consulted on earlier in the consultation paper, so that idea has been tested but was not included in either of the drafts of the bill.

...

I can describe the policy benefits and issues associated with that. You can have a target market determination, a non-target market determination, or both. In the pool of customers, there will be people for whom a product is suitable, people for whom it is definitely not suitable and there will be people in the middle. If you have a scenario in which you have both—so, every issuer would need to identify for whom it is suitable, for whom it is definitely not suitable, and then there are the people in the middle as well—it does create a very complex system where they have to have two sets of rules associated with getting it to the people in the target market determination, making sure non-target market people are ineligible to purchase it, if that is the design, and then it leaves all of the people in the middle. So it is a much more complex system and it has less clarity about the purpose of the regime. A regime in which there is just a target market determination puts the obligation on issuers to say, 'This is for whom it is suitable and let's have distribution conditions which direct the product to them.' That is the goal. It's to get the issuers to think about for whom it is suitable rather than them having multiple goals—one for whom it is suitable, one for avoiding for whom it is not and the open question of the people in the middle. That is a much more complex regime.[11]

Product Intervention Powers – the range of products covered

1.20      ASIC in their submission reiterated their request that all products regulated by ASIC be included in the scope of the product intervention powers:

However, as outlined in our ED submission, we think the more efficient route to achieving comprehensive coverage would be to include all ASIC Act products within the scope of the product intervention power from the outset. Without the broadest power, we may be limited in responding to emerging risks in an effective and timely way.

One example of a lightly regulated, but rapidly growing sector is the buy now pay later sector. Most buy now pay later arrangements would technically fall outside the scope of the product intervention power, despite these services being financial in nature.[12]

1.21      Buy now pay later company Afterpay supported this proposition:

Afterpay is supportive of the general sentiments underpinning the proposal for ASIC to be given product intervention powers in recognition of the need for strengthened consumer protection measures in relation to products that fall within ASIC's regulatory responsibility but are not regulated by either the Corporations Act or the National Credit Code (i.e. 'ASIC Act only' products). We are also supportive of the concept outlined in ASIC's subsequent proposal (in their August 2018 submission to the revised exposure draft) for this power to be extended to cover all (rather than specified only) 'ASIC Act only' products—which would include Afterpay. However, we request further information and consultation on the detailed design of the intervention powers in order to determine our final position on the proposal.[13]

1.22      Consumer organisation are also in support:

Apply the PIP and DADOs regimes to 'financial products' as defined in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) to ensure the widest possible coverage.[14]

Shortfalls in consumer redress provisions

1.23      Consumer organisations also expressed concerns about some possible shortfalls in consumer redress as set out in this legislation:

Under the revised bill, the intervention power would also only apply prospectively, meaning that intervention cannot apply to products already acquired by the consumer. We consider this to be highly problematic. Many products are acquired before evidence of harm becomes apparent. This is particularly the case for longer term products such as life insurance and home loans. We strongly recommend that ASIC be empowered to intervene in relation to products already acquired where there is a risk of significant harm.[15]

1.24      ASIC's view on the matter was that there are some details to be thought through about how such a provision might operate:

I think that's been reduced in some of the debate to an all-or-nothing, black-and-white argument. The way we see it, there are probably a few different categories there. One is that we've got a product intervention because there is significant consumer detriment. It may be that what is causing that consumer detriment was completely lawful conduct at the time. The product intervention allows us to do something to stop that conduct continuing, but it doesn't allow us to go back and say, 'We're now saying that product was unlawful back then, and you have to pay compensation for engaging in it,' and I think that's appropriate.

A second situation might be that the thing we intervene in relation to was lawful but it was driving unlawful conduct—say, our recent intervention in relation to flex commissions; they were the commissions offered to people distributing finance and other products in car yards, where if they convinced the customer to take the loan at a higher interest rate their commission would go up dramatically. It put them in a position where they had diametrically opposed interests to those of their customer. Those commissions weren't unlawful, but they may have driven lots of conduct that was. In a situation where the person selling the finance in the car yard has such a high incentive to do the wrong thing by their customer, it's quite likely that on occasion they're going to be engaging in misleading and deceptive conduct or unconscionable conduct to convince the customer to take the loan at this very high interest rate that's going to give them the big commission.

If you take away those commissions, that incentive's not there, so we've fixed that problem. But if the thing that we've intervened about has also driven conduct that was unlawful under the existing law—misleading and deceptive conduct or unconscionable conduct—and we can gather evidence of that, then we could go back and seek compensation for the customers affected. Then you get to a third category. I think this is one where the design and distribution obligations come into play. Once they're in force, it's very likely that in many cases where there's enough detriment in a market that we need to have a product intervention then that means that the wrong product's been going to wrong customers.[16]

1.25      Treasury's view in response to a question on notice was the following:

Providing additional causes of action, or removing causes of action, is the kind of reform that would ordinarily be considered in the context of the broader regulatory framework. We note that a holistic review of the enforcement framework has been undertaken as part of the ASIC enforcement review. The review did not recommend that ASIC be empowered to bring civil action on behalf of individuals who have suffered loss or damage. Recommendation 42 did, however, recommend that Courts prioritise the payment of compensation over payment of pecuniary penalties to the State.[17]

Outsourcing of legislation

1.26      Treasury officials stated that the drafting of this legislation was outsourced:

Senator KETTER:  In terms of the drafting of this bill so far, was it drafted in-house or was it outsourced?

Ms O'Rourke:  The bill was prepared by alternative drafters.

Mr Bowd:  Treasury's practice isn't to comment on whether bills are outsourced or drafted by OPC. We don't do that for a number of reasons, but the most important is that in terms of the alt drafting regime providers are put under strict confidentiality requirements where they can't disclose what they're working on. And we've adopted the same practice, so we don't disclose whether our bills are alt drafted or not alt drafted; or who is, would be or isn't drafting for particular bills.[18]

Views on the concerns raised

1.27      Labor Senators support the proposition that the scope of financial products covered by both the Design and Distribution Obligations and Product Intervention Powers should be those as set out in the ASIC Act. At a time where there is significant financial product innovation, it is important that ASIC is equipped to take action where it sees an emerging need.

1.28      Labor Senators also believe consideration should be given to extending the Design and Distribution Obligations to products covered by the National Consumer Credit Protection Act for similar reasons.

1.29      Labor Senators note the evidence from ISA about the benefits of determining a non-target market. Labor Senators also note the evidence given by ASIC about the complexity of administering such a regime. Labor Senators are of the view that ASIC's guidance should include both expectations regarding statements of inclusion and statements of exclusion and that target market determinations should include significant statements in both categories.

1.30      Labor Senators are supportive of ASIC's recommendation to improve the remedies available to consumers under the Design and Distribution Obligations, particularly giving ASIC the ability to seek compensation on behalf of people who are non-parties to legal proceedings in a way consistent with other provisions.

1.31      Labor Senators remain concerned that consumers who form part of the evidence base for ASIC intervention may be limited. Notwithstanding Treasury's response to this topic, Labor Senators believe that these issues are the kinds of concerns that should be canvassed through the exposure draft process.

1.32      Labor Senators are concerned that this legislation, which is complex, wide ranging and applicable to a very significant part of the Australian economy was prepared by an external party. Treasury have offered very few details to date on such alternative drafting arrangements through both legislation inquiries as well as Senate Estimates. At this point in time, Labor Senators cannot satisfy themselves that the law firm or law firms that contributed to this legislation are not at the same time representing one or more major financial institutions. This will remain a point of further inquiry by Labor Senators through Senate processes.

1.33      Finally, Labor Senators support section 2.40 of the Chair's report and agree that if this legislation lacks efficacy, that consideration be given to extending ASIC's power to making orders dealing with training and remuneration.

Conclusion

1.34      Labor Senators are concerned that this bill does not match the Government's rhetoric on standing up for ordinary Australians and cleaning up the banking and financial services sectors.

1.35      Labor Senators will introduce amendments that strengthen ASIC's remit so that conduct in the industry can be elevated, which will ensure that we have a sector that consumers can engage with and place their trust in.

Recommendation 1

1.36             To amend the bill such that both design and distribution obligations and product intervention powers apply all financial products specified in the ASIC Act.

Recommendation 2

1.37             To consider amending the bill such that design and distribution obligations apply to credit products defined in the National Consumer Credit Protection Act.

Recommendation 3

1.38             To amend the bill such that it provides a further private cause of action where an entity fails to make a target market determination.

Recommendation 4

1.39             To 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.

Senator Chris Ketter                                 Senator Jenny McAllister
Deputy Chair                                               Senator for New South Wales

Navigation: Previous Page | Contents | Next Page