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A new bill requiring product issuers to ensure products are targeted and offered to the right customers, as well as enabling ASIC to intervene when inappropriate products are distributed, has passed Parliament.
The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019 has passed both houses of Parliament.
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Under the bill, product providers will be obligated to specify the target market for each of their products, ensuring that the design of the products are consistent with the likely objectives, financial situation and needs of customers within that target market.
The obligations will be phased in over two years, requiring product issuers to identify in advance the consumers for whom the products are appropriate, and distribute to that target market.
Treasurer Josh Frydenberg commented: "The Coalition Government has passed legislation through the Parliament to introduce design and distribution obligations for all financial and credit products within the Australian Securities and Investments Commission’s (ASIC) regulatory responsibility.
"These reforms mean consumers will be better protected from being sold financial and credit products that are not suitable for their circumstances," he said.
Welcoming the passage of the bill, the Financial Services Council (FSC) noted that financial products and services providers are now legally obligated to take a “customer-focused approach” when designing and distributing products, which adds “an extra layer of protection” for customers.
The bill also introduces a product intervention power enabling the Australian Securities and Investments Commission (ASIC) to step in to protect customers from inappropriate products if there is a risk of significant detriment.
Following the bill’s passage, ASIC chair James Shipton said the new powers will enable the corporate regulator to “take broader, more proactive action to improve standards and achieve fairer consumer outcomes in the financial services sector”.
“This will be a significant boost for ASIC in achieving its vision of a fair, strong and efficient financial system for all Australians,” the chair said.
“This will also provide invaluable assistance to ASIC as we all seek to rebuild the community’s trust in our banking and broader wealth management industries.”
However, FSC chief executive Sally Loane noted that while ASIC’s new power is an important one, the council believes “the greatest consumer benefit comes from quality advice and products appropriate for the goals and needs of individuals”.
“[ASIC] will need to build a clear framework for how the new regime will operate. The FSC looks forward to working with ASIC to progress these important reforms,” Ms Loane said.
The legislation additionally requires issuers who distribute their own products, as well as third-party distributors such as brokers and financial advisers, to take steps ensuring that the way they market, advise on or sell products is aligned with the target market determination for that product.
Mr Shipton also welcomed the original legislation being amended to extend the reach of these reforms to a broader range of financial products.
Treasurer Josh Frydenberg concluded: "Restoring trust in Australia’s financial system is part of our plan for a stronger economy.
"That is why the Coalition Government is taking action on all 76 recommendations of the [banking] Royal Commission’s final report and, in a number of important areas, is going further including by better protecting consumers.
"By introducing design and distribution obligations and providing ASIC the power to intervene, the Government is yet again going further in its response to the Royal Commission."
Commissioner Kenneth Hayne had recommended in his final royal commission report the extension of the design and distribution obligations to products regulated by the National Consumer Credit Protection Act 2009 and the Australian Securities and Investments Commission Act 2001.
The commissioner noted in his final report that the original legislation did not extend ASIC’s product intervention powers to financial products that are not regulated by the Corporations Act, but are only regulated by Division 2 of Part 2 of the ASIC Act.
This part of the ASIC Act defines a financial product as “a facility through which, or through the acquisition of which, a person does one or more of the following: (a) makes a financial investment, (b) manages financial risk, (c) makes non-cash payments.”
Mortgages, therefore, would not have fallen within the definition of financial product and, further, are not regulated by the Corporations Act, meaning that the ASIC’s proposed product intervention powers would not apply to mortgages.
“It will also empower ASIC to intervene in relation to a wider range of products where ASIC identifies a risk of significant detriment to consumers,” the regulator noted following the passage of the bill.
