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Draft legislation proposes design and distribution obligations for financial products

Ann-Marie_ColemanLate last year, the Government released an exposure draft of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2017 (Bill). The Bill seeks to introduce:

  • design and distribution obligations for financial products to ensure such products are targeted at the right people; and
  • a temporary product intervention power for ASIC when there is a risk of significant consumer detriment.

Design and distribution obligations

The design obligations apply to the offerors of financial products and include obligations to:

  • Make a target market determination (determination) for the product before dealing in the product or providing financial product advice in relation to the product. Such determination must be in writing and describe the class of persons who comprise the target market for the product and set out any conditions/restrictions on dealing in, or providing financial product advice in relation to, the product. The determination must be drafted so that, if the product was sold in accordance with the determination, the product would generally meet the likely objectives, financial situations and needs of the persons in the target market.
  • At the same time that the determination is made, identify “review triggers”, being events/circumstances that would reasonably suggest that the determination is no longer appropriate, and determine the maximum period between reviews of the determination.
  • Review the determination as required to ensure it remains appropriate.
  • Keep records of the determination and related decisions.
  • Notify ASIC if it becomes aware of a significant dealing in the product that is not consistent with the determination.

The distribution obligations apply to both the offerors and distributors of financial products and include obligations to:

  • Not deal in, or provide financial product advice in relation to, the product unless the determination for the product has been made (or, if one has been made, where the determination may no longer be appropriate).
  • Take reasonable steps to ensure any dealing or advice is consistent with the most recent determination.
  • Collect distribution information in respect to the product.
  • Notify the issuer if it becomes aware of a significant dealing in the product that is not consistent with the determination.

ASIC will be given powers to enforce the new arrangements, including the ability to request necessary information and issue stop orders.

If the Bill is passed, the design and distribution obligations would come into effect 12 months after the date the Bill is passed.

Product intervention powers

Under the Bill, ASIC’s product intervention powers will also be enhanced, allowing it to make an order that a person must not engage in specified conduct where it is satisfied that issue of the product has resulted in, or is likely to result in, significant determent to retail clients.

Examples of possible orders include:

  • Banning a person from issuing a product or class of product to consumers;
  • Directing that a particular product or class of product only be offered by way of issue to particular classes of consumers or in particular circumstances; and
  • Directing that a product or class of product not be distributed unless accompanied by an appropriate warning or label.

There are some limitations on the types of orders that can be made. Intervention orders can last for up to 18 months (unless extended by the Minister).

If the Bill is passed, the product intervention powers would come into effect the day after the Bill is passed.

Implications

The proposed changes are significant for financial product providers and distributors. If the Bill is passed, financial product providers and distributors will need to review (and possibly update) their policies and procedures relating to the design, distribution and review of financial products to ensure they meet the requirements under the Bill.

Consultation on the draft legislation closed on 9 February 2018. Further information can be found here.