Justin Dyson
Partner
Corporate Advisory
Proposed amendments to the Workers’ Compensation and Injury Management Act 1981: COVID-19 Response & removal of termination date
3 July, 2020
ASIC has confirmed its potential broad use of the Product Intervention Power in Regulatory Guide 272, released on 17 June 2020.
ASIC has moved on from the Federal Court’s recent endorsement of its first use of the Product Intervention Power, in Cigno Pty Limited v ASIC [2020] FCA 479, to issue a finalised Regulatory Guide which confirms the broad scope of its discretion for future use. In doing so, it considered submissions received from a broad range of interested parties.
ASIC’s discretion to use the Product Intervention Power
At the heart of the Product Intervention Power is ASIC’s discretion to make an order if it is satisfied that a financial product “has resulted in, or will or is likely to result in, significant detriment to retail clients”. Regulatory Guide 272 includes a good deal of detail about how ASIC will exercise that discretion and the steps it will take before doing so. The purpose of this article is to pick out a few of the more interesting aspects of that guidance.
When does detriment become “significant”?
ASIC has offered little guidance on what is required for detriment to be considered “significant” and therefore trigger its right to use the Product Intervention Power. It notes that the Corporations Act 2001 (Cth) does not define the term and that the Explanatory Memorandum states only that:
Generally, this would require the detriment [or potential detriment] to be sufficiently great to justify an intervention, having regard to the circumstances of the case and the object of the intervention power.
Consistent with this, ASIC states only that, whether detriment is significant will “depend on the individual circumstances of the matter”. ASIC will need to consult on the detriment it believes exists in each case – so interested parties will have an opportunity to have their say on significance – however, subject to that, ASIC will retain a broad discretion on the application of this important threshold.
Can the Product Intervention Power be used when there is full compliance with the law?
Yes. The Product Intervention Power may be used even where all applicable laws have been complied with, provided that significant consumer detriment still arises. That position is, in itself, an illustration of how far regulation has moved in recent years – from a focus on disclosure and compliance to one of customer needs, expectations and outcomes. ASIC does note, though, that use of the power should become less likely once the Design and Distribution Obligations requirements have been implemented (ie. given their focus on the likely objectives, financial situation and needs of customers). However, it does not rule out its potential for use even where those requirements have been met.
Does a product need to be inherently harmful for the power to be used?
No. ASIC has confirmed that significant consumer detriment can arise as much from how and to whom a product is distributed, as from its intrinsic features. It rejected submissions that the power should only be used where consumer detriment arises from a feature of the product itself rather, for instance, than from the manner of its distribution or from a risk of mis-selling.
The Regulatory Guide makes direct reference to the Explanatory Memorandum in this regard, which refers to detriment arising from a number of sources, including not only “the product’s features, defective disclosure, poor design”, but also “inappropriate distribution”. The Guide adds to that by stating that regard can also be had to the circumstances in which the product is offered, including the way in which it is marketed and targeted at customers – as ASIC has put it in other contexts, the “choice architecture” built around the product.
While the Guide is quite clear, this issue may not be entirely closed. The Federal Court’s decision in Cigno Pty Limited v ASIC was principally concerned with whether ASIC was limited to considering detriment arising from the subject credit product alone, or whether it could also consider detriment arising from Cigno’s overall short-term lending model. While the court found that the broader interpretation should apply, Cigno appealed the decision in May 2020, so we may see more on the issue. A link to our recent article on the Cigno decision can be found here.
Does a product’s time in the market protect it from a Product Intervention Order?
No. ASIC considered submissions that there is less likely to be consumer detriment when a product has been available in the market for a long period of time, for instance because the “availability of that product reflects consumer demand and understanding of the product”. It rejected the point, though, saying that it is not necessarily the case that the age of a product will be an indicator against consumer detriment. While that’s a fair point, it also seems reasonable that ASIC should have regard to whether a product’s terms and risks have become well understood by customers over time in assessing any resulting detriment.
Will ASIC engage in confidential consultations with affected parties before going public?
No, or at least it will not commit to doing so. ASIC received submissions noting the benefits of it engaging in confidential consultations ahead of any public consultation, including that those would give ASIC an opportunity to clarify facts, work through options for addressing the detriment and avoid unnecessary reputational harm. In response, ASIC noted that it is not required to engage in confidential consultations, but that:
it would be likely that firms will be aware of our concerns through the course of our regulatory work, before we consult on a proposed product intervention order.
While ASIC’s desire to retain flexibility on this point is understandable, in practice there are likely to be real benefits for both ASIC and the parties concerned in holding frank discussions before any use of the Product Intervention Power. That will not only assist with clarifying any facts that will form the basis for ASIC’s use of the discretion, but also provide a valuable opportunity to explore “the most appropriate regulatory solution” for addressing the identified detriment, should ASIC go ahead to use the power.
Will Product Intervention Orders be published?
Yes, and ASIC says that it will “generally” also publish a media release on its website to publicise the order.
When might ASIC next use the Product Intervention Power?
ASIC has already engaged in consultation relating to two further uses of the power (in addition to its initial use with respect to short-term lending). The first relates to OTC binary options and CFDs and the second to the sale of add-on insurance and warranty products by motor dealers.
As to the second of these, the proposed use of the power in that case is a relatively complicated one and needs also to have regard to the broader Deferred Sales Model framework currently being developed, which is itself targeted for commencement by 1 January 2022.
ASIC’s Regulatory Guide 272 can be found here.
For more information on the operation of the Product Intervention Power, please contact insurance advisory principal, Mathew Kaley.
