The Australian Government introduced the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 (Product Regulation Bill) into Parliament in September 2018. The Product Regulation Bill introduced two reforms in financial services:
(a) a product intervention power for ASIC (“PI Power”); and
(b) a new governance regime for the design and distribution of financial products (design and distribution obligations).
Following the introduction of the PI Power laws, ASIC issued a consultation paper on how it intends to apply the law (Consultation Paper [CP 133] Product intervention power). [CP 313] includes a draft regulatory guide, with comments due by 7 August 2019.
The PI Powers are a clear sign that, following the Hayne Royal Commission, the “disclosure-based” regulatory philosophy that prevailed after the 1996 Wallis Inquiry has run its course. Whereas the Wallis Inquiry of 1996 sought to create “no undue restrictions on institutions or the products they offer”, the Hayne Royal Commission recommended the Government provide ASIC with “a product intervention power that would enhance its regulatory toolkit when there is a risk of significant consumer detriment”. As is normally the case, the PI Power has been given to ASIC following similar moves in foreign jurisdictions including United States, the United Kingdom, the European Union, Hong Kong and Taiwan.
What are the PI Powers?
The PI Power will allow ASIC, on its own accord, to remove a financial product (or class of financial products) from retail investment markets where ASIC considers the product will produce (or has produced) significant consumer detriment. It is described by ASIC as a “proactive” power which does not need to be associated with a breach of any particular law.
The concept of “significant consumer detriment” is a naturally difficult concept to define and ASIC has suggested this could include harm that is financial in nature, non-financial or “when consumers are sold a product that is misaligned with their needs, understanding or expectations, and that detriment arises even before that misalignment crystallises into some financial or other loss”.
Another complicated attempt to describe the concept is at paragraph 46 of the draft Regulatory Guide:
Significant consumer detriment can also be caused by the way that the product or service is framed and how options, processes and pathways for the product are organised and presented—that is, the ‘choice architecture’ built around the product.
Upshot for retail managed investment schemes
ASIC make clear that they have no intention of approving financial products, and so product manufacturers will have to take significant care to avoid drawing ASIC’s attention over the potentially broad concerns contained within the universe of “consumer detriment”.
ASIC provides a couple of case studies in [CP 313] but neither shed any real light on responsible entities of registered schemes. For the near future, the industry will have to deal with ASIC as it gets used to its powers. The market will need keep a close watch on when a PI Power is used and ASIC’s description of its concerns.
We will watch with interest what ASIC do about some forms of managed funds that it has historically documented concerns about. These include:
- Retail mortgage (credit) funds that are offered as “shadow banking” products;
- Agribusiness MIS that are established around the availability of upfront tax deductions;
- Leveraged funds including hedge funds;
- Funds described as “capital protected”, which are marketed as having downside protection; and
- Rare or abnormal underlying assets – aquaculture; horticulture; or a variety of other assets.
Upshot for ASIC
ASIC can do much good with its new powers, but will face even greater criticisms for inaction if retail investors lose money where the PI Power could have been used. ASIC reinforce the PI Power is not designed or intended to prevent all monetary losses or eliminate all risk from the financial markets. The PI Power cannot re-write history so a problematic product that is already in the hands of a retail investor stays there irrespective of whether the product has been the subject of a subsequent intervention order. These will hard messages for ASIC to convey.
Products may also be positive in various stages of the economic cycle and diabolical in others. It will be interesting as to how these challenges are navigated.
All in all, we watch this space and see how the PI Powers interact with the other legislative limb passed by the Government: the design and distribution obligations. There is no doubt that ASIC must now be considered a merit-based regulator. It will carry a new level of burden to protect other people’s money from some of the perils of the financial system.
Chief Executive Officer