Financial products - design and distribution obligations and product intervention powers

By Michael Mathieson
Financial Services Risk & Compliance

In brief

After a gestation period roughly one-and-a-half times as long as that of an elephant, the proposed new design and distribution obligations for financial products, and intervention powers for ASIC, took their first, tentative steps yesterday, with the release of exposure draft legislation. The consultation period is not so long – you have until 9 February 2018 to make a submission. Senior Regulatory Counsel Michael Mathieson reports.

Design and distribution requirement

The primary obligation is to make a 'target market determination'. The obligation applies where, under Part 7.9 of the Corporations Act, a PDS must be prepared or given for the product, or where an offer of the product would need disclosure to investors under Part 6D.2. However, the obligation will not apply where the product is a MySuper product, a margin lending facility or a security to which an employee share scheme applies. It will also not apply where the product is an ordinary share in a company, unless the ordinary shares are convertible into preference shares or the company carries on a business of investment in financial products, interests in land or other investments and it invests funds raised from the public.

The target market determination must be made by the person who prepares the disclosure document. They must make the determination before any person deals in the product or provides financial product advice in relation to the product. The requirement to make a target market determination is a civil penalty provision and a failure to comply with it will also be an offence.

A target market determination must describe the class of people who comprise the target market for the product and set out any conditions and restrictions on dealings in, or providing financial product advice in relation to, the product. The Bill provides two examples of distribution conditions: a condition that the financial product not be issued to a person unless they have received personal advice; and restrictions limiting the distribution of the product to specified 'distribution channels'.

A target market determination must be such that 'the product would generally meet the likely objectives, financial situations and needs of the persons in the target market'. The maker of a target market determination must also determine 'review triggers' and a 'review period', with a maximum review period having to be 'reasonable in the circumstances'.

There will be a prohibition on dealing in, and providing financial product advice about, a product if a target market determination has not been made. Further, the maker of a target market determination must take reasonable steps to ensure that dealings and financial product advice are 'consistent with the most recent determination'. They must notify ASIC if they become aware of a 'significant dealing' that is not consistent with the determination.

Where a product is to be issued for the first time, the obligation will commence one year after Royal Asset; in all other cases, it will commence two years after Royal Assent.

Product intervention orders

If ASIC is satisfied that a financial product has resulted in or will, or is likely to, result in 'significant detriment' to retail clients, ASIC may make a product intervention order. The Bill provides an example of such an order: that the product not be issued to a retail client unless they have received personal advice. Treasury would appear to have a lot of faith (I have chosen the word 'faith' carefully) in the prophylactic effect of personal advice. ASIC will also have a similar power in relation to classes of financial products.

There are some mildly interesting restrictions on the orders that can be made. A product intervention order may not impose an obligation on a person 'in the person’s capacity as a retail client'. Who would know what that is meant to address? Further, a product intervention order cannot: require a person to satisfy a training or professional standard; require a person who is not required to hold an AFSL to join an external dispute resolution scheme; or (and this bit is more than mildly interesting) – 'impose requirements in relation to a person's remuneration, other than so much of the remuneration as is conditional on the achievement of objectives directly related to the financial product'. I suppose if you have been unable to make FoFA work through legislation your next step is to let ASIC have a go.

ASIC must consult before making a product intervention order. A product intervention order cannot last for more than 18 months.