Treasury released its public consultation paper on the proposed introduction of product suitability obligations and intervention powers for ASIC in December, bringing the reforms recommended by the Financial System Inquiry one step closer to reality. The consumer protection measures will require issuers and distributors of insurance (and other financial) products to ensure products are suitable for their target market and give ASIC powers to intervene in product design and distribution arrangements to proactively guard against “significant” consumer detriment.
The consultation paper details the proposed new obligations and powers:
- Design and distribution obligations: The proposed obligations include that product issuers and/or distributors must: identify target and non-target markets for their products (based on investment needs, risk and consumers’ ability to understand the product); select appropriate distribution channels and marketing approaches; and conduct a post-sale review of their products.
- Product intervention power: This proposal would empower ASIC to make a range of interventions where a risk of significant consumer detriment is identified. Such interventions include: imposing distribution restrictions; amending a product’s marketing and disclosure material; mandating labelling or terminology changes; and banning a product.
While the release of the consultation on these reforms has been expected since last year’s Federal Election, the paper has provided further guidance on how the design and distribution obligation will be framed. It is noteworthy that:
- It is proposed that the obligation will not apply where personal advice is provided to the consumer, as adequate protections already exist in those distribution channels;
- The line between issuers and distributors is somewhat clearer, with Treasury proposing that the issuer will have the primary obligation to identify target (and non-target) markets and monitor their distribution, while the distributor must have appropriate systems in place to ensure they comply with the directions of the issuer. Issues around white-labelling and other distributor branded and controlled distribution arrangements remain;
- It is proposed that the product intervention power will apply to all financial and credit products, and operate for an 18 month duration unless ASIC seeks to impose the intervention on a permanent basis.
The consultation paper makes it clear that the reforms should not unnecessarily inhibit innovation, and that consumers should ultimately remain responsible for their investment decisions. Nevertheless, the reforms will mean that organisations may be exposed to a liability where products they underwrite or distribute are sold to people for whom they may not be appropriate, even where full and proper disclosure has been provided to the consumers in question.
The Government has invited feedback on the proposed new measures. Submissions are due by 15 March 2017. If you would like to discuss the issues raised by the consultation paper, or would like assistance preparing a submission, please contact Matt Ellis.