The scope of the Australian Securities and Investments Commission’s product intervention power is wide-ranging, including making orders even when financial services provider have complied with disclosure requirements and design and distribution obligations, and requiring prescribed “improvements”.
ASIC has released a regulatory guide (RG 272), setting out the way it will exercise the product intervention power that was established in legislation in April last year.
The power allows ASIC to make individual and market-wide product intervention orders where there is a risk of significant consumer detriment. It can take a range of temporary actions including stop orders, banning a product or product feature, imposing sale restrictions and amending product information.
A stop order applies to any person attempting to use the structure in question.
The government’s aim in giving ASIC the new power was to allow it to be more proactive in its approach to market regulation and able to respond to the risk of significant consumer detriment in a more flexible and targeted way, and to take action on a market-wide basis.
It also allows ASIC to act before there is a demonstrated breach of the law.
ASIC used the power last September, when it stopped a group of short-term lenders using a loan structure that it found caused significant consumer detriment.
The lenders were Cigno Pty Ltd, Gold-Silver Standard Finance Pty Ltd, MYFI Australia Pty Ltd and BHF Solutions Pty Ltd.
Under the Credit Act, a short-term credit provider is exempt from credit licensing and responsible lending obligations if the fees charged for a loan of up to 62 days do not exceed 5 per cent of the loan amount and 24 per cent per annum interest.
Under the loan structure in this case, the credit provider’s charges were within these limits but an associate charged upfront, ongoing and default related fees under a separate contract for management of the loan.
ASIC said that when all charges were combined the cost was almost 1000 per cent of the loan amount.
Cigno took the matter to court, arguing that ASIC’s use of its power was too broad, but its case was rejected.
ASIC said it considered the judgment in that case before finalising its guidance.
According to the guide, ASIC can make a product intervention order if it is satisfied that a product or class of products has resulted, will result or is likely to result in significant consumer detriment.
It can do this regardless of whether there has been a breach of the law. This means that a financial services provider may have complied with disclosure requirements and design and distribution obligations under the Corporations Act and still be subject to an order.
Products covered by the power include financial products regulated under the Corporations Act, credit products regulated under the National Credit Act and financial products as defined by the ASIC Act.
The guide provides more detail about the range of interventions ASIC can make. They include:
• ordering or banning the issue of a product;
• ordering that a product, or class of products, only be offered to specific classes of consumers;
• ordering that a product only be offered in specific circumstances;
• restricting or banning marketing, promotional or disclosure material;
• ordering that a product not be distributed without prescribed improvements to the information provided to consumer;
• banning or ordering changes to remuneration arrangements “that are conditional on the achievement of objectives directly related to the product”, such as when remuneration is linked to sales targets; and
• banning a product feature or ordering that the product feature not be available unless it complies with specified criteria, such as leverage limits on a product;
Some of the orders ASIC cannot make under the power include requiring a person to satisfy a standard of training or meet a professional standard, other than prescribed in legislation; requiring a person to join an external dispute resolution scheme, unless they are a licensee; and imposing remuneration requirements, other than where the remuneration is conditional on achievements linked to the distribution of the product.
Orders are prospective; they cannot apply to a product acquired before the order is made.
Orders can apply for up to 18 months. ASIC has discretion to set the duration.
The term “detriment” is “intended to cover a broad range of harm or damage that may flow from the product”, such as actual or potential financial loss, and non-financial harm, such as the effect on a credit rating.
Detriment can also occur when “consumers are sold a product that is misaligned with their needs, understanding or expectations.”
ASIC said: “The product intervention power is not directed towards eliminating all risk from the financial markets. For example, we are unlikely to exercise the power solely on the basis that a particular investment product has reduced in value and resulted in losses.”
In considering whether a product is likely to result in significant consumer detriment, ASIC’s considerations include the extent of any conflicts of interest, evidence of risk of confusion or misunderstanding, the “choice architecture” of the product, obstacles that consumers may face in using the product and products or conduct that are similar to ones.