In brief 6 min read
Three consultation papers released by ASIC in recent times are far more interesting for what they reveal about whether the newly-minted product intervention power was really needed in the first place, than they are for what they say about ASIC's intentions in exercising the power.
The first consultation paper (CP313) invited submissions on a draft regulatory guide setting out ASIC's proposed approach to using the product intervention power. There are a few points of interest in the draft RG and also in CP313 itself.
Draft regulatory guide
The draft regulatory guide includes some examples of potential interventions by ASIC. ASIC could: place restrictions on who a product may be issued to; require that a product only be issued in conjunction with personal advice or under a deferred sales model; require changes to marketing or disclosure material or 'improvements to the information provided to consumers'; regulate product features, for example by 'imposing leverage limits on a product'; or ban the issue of a product. In addition, ASIC could require remuneration that is linked to product distribution to be amended or removed – something I had (perhaps foolishly) thought was already addressed by the ban on conflicted remuneration.
The power can be used where ASIC considers it likely that there is or will be significant detriment to consumers. The draft guide includes examples: 'products that are not fit for purpose, sales or marketing techniques that prioritise commercial interests over consumer interests, and shrouding key features of a product, including fees and how they are charged'. According to ASIC the sale of add-on insurance and warranties through caryard intermediaries has previously involved 'price shrouding'.
The draft guide also includes some commentary on the relationship between the product intervention power, which is in force now, and the design and distribution obligations, which will commence in April 2021. You might think that if the design and distribution obligations, once they commence, are complied with, there may be little (if any) need for ASIC to use its product intervention power. However, ASIC says that a product may cause significant consumer detriment even if the design and distribution obligations are complied with. That statement is not substantiated (although it is also difficult to rebut). Further, ASIC flags the possibility of exercising the product intervention power and, in addition, taking enforcement action for breach of the design and distribution obligations (if and when such a breach occurs).
ASIC must consult with those likely to be affected by a product intervention order before the order is made. Unsurprisingly, it states that the length of the consultation period 'will depend on the circumstances' of each case.
Finally, ASIC notes that where a product intervention order is given to a particular organisation it is subject to merits review in the AAT, while a class order is not (as it is a legislative instrument). This provides ASIC with an obvious opportunity to bypass the possibility of merits review – by simply making a class order.
In the consultation paper, ASIC sets out two case studies (one from 2009 and another from 2011) where it says it may have considered using the product intervention power had it had such a power at the time. However, in my view the case studies tend to support the proposition that such a power was (and is) unnecessary.
The first case study concerned the automatic rollover of term deposits. Under a 'dual pricing' system the ADI would offer very attractive interest rates on a small number of term deposits and much less attractive interest rates on the rest. Further, it would change the term deposits with the attractive rates from time to time. Therefore, a consumer might take out a term deposit with a very attractive rate and, at the end of the term (and in the absence of a positive decision by the consumer), the principal and interest would be rolled over into another term deposit for the same term but at a much less attractive rate.
ASIC was concerned about this practice and engaged with the ADIs and the ADIs changed their practices. ASIC says that, in the absence of a product intervention power, it was limited to making 'recommendations' to the ADIs. However, it is clear from the case study that ASIC's main concern was that consumers were being misled. If misleading conduct did in fact occur then one is left to speculate as to why ASIC did not take enforcement action. If misleading conduct did in fact occur then a product intervention power would not have been required.
The second case study concerned 'flex commissions' in the car finance market. However, these were eventually banned by ASIC by way of a modification declaration made in 2017 under the National Consumer Credit Protection Act 2009. Plainly, a product intervention power was unnecessary in that case.
CP313 was issued on 26 June and the consultation closed on 7 August with the final regulatory guide due to be issued in September.
On 9 July, ASIC issued a consultation paper addressing its first proposed exercise (or, to use ASIC's word, 'deployment') of the product intervention power – to 'stop consumer harm in short term credit' (CP316).
ASIC's description – 'short term credit' – could lead you to think that the proposed order will have a much wider operation than it will in fact have. As it happens, the proposed order is concerned with a very small component of what might be considered 'short term credit' – so small, in fact, that to ASIC's knowledge there is only one organisation (comprising two related companies) that has been using the particular form of short-term lending that will be regulated by the proposed order. Even so, it is proposed to make the order as a class order, not as an individual order. One can well understand ASIC's reasons for taking that approach, although taking that approach also has the happy (for ASIC) consequence that the order, if made, will not be subject to merits review.
It is interesting to note that the consultation period ended on 30 July, meaning those potentially affected had 21 days (although not 21 clear days) in which to consider the proposal and respond. However, consistent with ASIC's draft regulatory guide, future consultation periods could be shorter or longer than 21 days.
ASIC anticipates making a decision on the proposed order sometime this month.
Finally, on 18 July ASIC issued a consultation paper on a proposal to ban unsolicited telephone sales of direct life insurance and consumer credit insurance (CP317).
When I saw the press release for this, I expected it would be ASIC's second proposed exercise (or 'deployment') of the product intervention power. However, in this I was wrong. It turns out that the proposed ban on a particular means of distributing these products is to be implemented by exercising of one of the many modification powers under the Corporations Act 2001.
The product intervention power has been enacted and, having long campaigned for it, ASIC will want to, indeed need to, use it. Whenever it uses the power, ASIC will have to justify its use by reference to the likelihood of significant consumer detriment. I would respectfully suggest that that is the right way to justify the existence and use of the power. I would also respectfully suggest that the rather worn-out line about ASIC's pre-existing powers having been inadequate should be permanently retired.