In brief 6 min read
Following its consultation in June last year, ASIC has now published RG 272, setting out ASIC's approach to using its product intervention powers. In this update, we examine the scope of this power and the accompanying regulatory guidance.
What is the power?
Since April 2019, ASIC has had the power to make product intervention orders in relation to financial or credit products (or a class of products) when it is satisfied the product has resulted in, or will or is likely to result in, significant detriment to retail clients. The power is broad and can be used by ASIC to make an order even where there is no actual or suspected breach of the law.
ASIC can make two types of orders:
- An individual product intervention order applying to a specified person(s) in relation to a product. ASIC indicates that this will likely be appropriate if the problem is specific to a particular entity or person.
- A market-wide product intervention order applying to a person in relation to a class of products. This will be made by legislative instrument and ASIC indicates that this will likely be appropriate when it is seeking to address a relatively widespread practice or, even if the practice is not relatively widespread, when there is a risk that the practice will be 'phoenixed' or is one which could be adopted by others.
ASIC must consult on the proposed order before making it, and this will usually be published on its website inviting public comment. Interestingly, a failure to consult by ASIC does not invalidate the order. Orders can apply for an initial period of up to 18 months, but can be extended or made permanent with the approval of the Minister.
Failure to comply with the order could result in imprisonment and the imposition of civil penalties, as well as potential civil liability in relation to any consumers who suffer loss or damage as a result of a failure to comply with the order.
What kinds of interventions may be made?
ASIC has the flexibility to make a wide range of orders and it has indicated it will look to utilise this flexibility to craft an intervention that it considers to be the most appropriate solution depending on the potential detriment being caused. Some examples of the kinds of interventions which ASIC may look to make are described in RG 272 and include:
- banning orders - whether entirely, for certain consumers, in certain circumstances, or unless specified improvements are made;
- notification obligations;
- orders to amend, restrict or ban certain marketing;
- orders that products may only be offered by way of issue to specific classes of consumers; or
- orders that products may only be offered in specific circumstances - eg through personal advice or deferred sales models.
ASIC's only use of its power to date has been by way of legislative instrument to limit the ways in which certain short-term credit may be provided to customers and the amount of fees and charges which can apply to those products. The Federal Court recently dismissed an appeal in relation to this order, deciding that ASIC had validly exercised its powers. The decision supported ASIC's view that there is no need for there to be an existing product, let alone more than one product, for a market-wide order to be made.
What is significant detriment?
ASIC's power is triggered only when it is satisfied that there is or is likely to be 'significant consumer detriment' in relation to a product or class of products. This term is not defined in the relevant legislation, and ASIC has indicated in its response to the consultation on RG 272 that it is unwilling to provide detailed guidance on what it considers to be significant detriment to avoid limiting its powers. It is clear, therefore, that what ASIC considers to be significant detriment will be highly dependent on the circumstances of each particular case.
The factors which ASIC will consider when determining whether a product or class of products has resulted in, or is likely to result in, significant consumer detriment include:
- the nature and extent of the detriment – including the number and proportion of customers affected or likely to be affected;
- the actual or potential financial loss to consumers resulting from the product – including the cost of acquiring the product and any actual or potential losses flowing from mis-selling of the product; and
- the impact the detriment has had, will have or is likely to have – in assessing the impact, ASIC may also consider the vulnerabilities faced by consumers at particular times of their lives or their engagement with the financial system.
Given the subjectivity afforded to ASIC in determining whether to exercise its powers, it is difficult to anticipate all of the potential circumstances in which it may seek to use its powers. However, ASIC has indicated that situations of significant detriment could arise in the following circumstances:
- a product being poorly designed;
- a product being distributed or targeted at consumers who are unaware of its risks, or who have inconsistent objectives with the product;
- a product not being fit for purpose;
- sales and marketing techniques prioritising commercial interests over consumer interests; and/or
- shrouding key features of the product, including fees and how these are charged.
The power isn't directed at removing all risk from financial markets, so ASIC is unlikely to exercise its power solely on the basis that a particular product has reduced in value and resulted in losses – more is likely to be needed (such as poor design or distribution) before ASIC will intervene.
Importantly, ASIC (and the Federal Court) take the view that the significant detriment may be a direct or indirect result of the issue of the financial product – so all that ASIC needs to establish is that the detriment would not have existed 'but for' the existence of the product.
Down the track
ASIC has recently concluded consultations on two further proposals to exercise its product intervention powers by making legislative instruments: one in relation to the issue and distribution of over-the-counter binary options and contracts for difference to retail clients; another in relation to the distribution of add-on insurance and warranties by car yard intermediaries. Now that RG 272 has been published, it is likely that responses to these consultations will soon follow.
ASIC will likely be emboldened by the recent Federal Court decision confirming that the market-wide product intervention power in relation to a class of products can be made even if there are no products currently in the class. Given the broadness and flexibility of ASIC's powers, we therefore expect that many future interventions will continue to be made using this power instead of the individual product intervention power. Given that the market-wide product intervention order power is not subject to a merits review (unlike the individual product intervention order), this is certainly a happy coincidence for ASIC.