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Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018



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ISSN 1328-8091

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BILLS DIGEST NO. 51, 2018-19 18 DECEMBER 2018

Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 Paula Pyburne Law and Bills Digest Section

Contents

The Bills Digest at a glance .............................................. 4

Purpose of the Bill ........................................................... 5

Structure of the Bill ......................................................... 5

Background ..................................................................... 5

Measure 1—design and distribution obligations ........ 5 ASIC report ................................................................ 5

Options ...................................................................... 6

Measure 2—product intervention powers ................. 6 Rectifying consumer detriment ................................ 6

Responding to emerging risks ................................... 6

Options ...................................................................... 7

Government response ................................................ 7

Consultation .............................................................. 8

Royal Commission ..................................................... 8

Committee consideration ................................................ 8

Senate Standing Committee on Economics ................ 8 Senate Standing Committee for the Scrutiny of Bills .............................................................................. 9

Policy position of non-government parties/independents...................................................... 9

Position of major interest groups................................... 10

Design and distribution obligations .......................... 10

Product intervention powers .................................... 10

Date introduced: 20 September 2018

House: House of Representatives

Portfolio: Treasury

Commencement: Sections 1-3 on Royal Assent; Schedule 2 on the day after Royal Assent and Schedule 1, two years after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at December 2018.

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Further comments ................................................... 11

Financial implications .................................................... 11

Statement of Compatibility with Human Rights.............. 11

Parliamentary Joint Committee on Human Rights ... 11 Schedule 1—key issues and provisions ........................... 11

Penalties and offences in the Corporations Act........ 11 Updating penalties .................................................. 12

Nature of the design and distribution obligations .... 13 Making a target market determination .................... 13 What is excluded ..................................................... 14

Use of delegated legislation .................................... 16

Scrutiny of Bills Committee ..................................... 16

Key issue—extent of regulatory capture ................ 16 When a determination is to be made ..................... 17

Key issue—when retail product distribution conduct occurs ........................................................ 18

Contents of the determination ............................... 18

Determinations must be appropriate ..................... 19 Stakeholder comments ........................................... 20

Reviewing the determination ................................... 20

Distribution of financial products ............................. 22

Reasonable steps ..................................................... 22

Stakeholder comments ........................................... 23

Record keeping .......................................................... 23

Notify ASIC of any significant dealings ...................... 24

Key issue—what is a significant dealing .................. 24 ASIC’s powers ............................................................ 25

Information to be provided to ASIC ........................ 25

Stop orders .............................................................. 25

Civil liability ............................................................... 26

Schedule 2—key issues and provisions ........................... 26

Amending the Corporations Act ............................... 26

Making an intervention order ................................... 27

Significant detriment ............................................... 28

Requirement for consultation ................................. 29

Duration .................................................................. 29

Notification requirements ....................................... 30

Stakeholder comments ........................................... 30

Enforcement of product intervention orders ......... 31 Civil liability ............................................................. 31

Amending the Consumer Credit Act ......................... 31

Significant detriment ............................................... 32

Key issue—consumer leases ................................... 32

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Table 1: Lease costs for Centrelink recipients .... 33 Enforcement ............................................................ 33

Concluding comments ................................................... 34

Design and distribution obligations .......................... 34

Product intervention power ...................................... 35

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The Bills Digest at a glance

Purpose of the Bill

The purpose of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 (the Bill) is to:

• amend the Corporations Act 2001 to introduce design and distribution obligations in relation to financial products and

• amend the Corporations Act and the National Consumer Credit Protection Act 2009 (Consumer Credit Act) to give the Australian Securities and Investments Commission (ASIC) a product intervention power.

Design and distribution obligations

The new obligations apply to offers of financial products that require disclosure under the Corporations Act. This includes products that require disclosure to investors, for instance by way of product disclosure statements, although there are some specific exclusions.

The design obligations which are imposed upon the person who is responsible for preparing the disclosure document require that person to:

• make a determination in relation to the target market for the product

• review the target market determination to ensure it remains appropriate

• keep a record of the person’s decisions in relation to the new regime and

• notify ASIC of any significant dealings in a product that is not consistent with the target market determination for that product.

The distribution obligations require that a distributor of financial products does not:

• engage in dealing, providing financial product advice, giving a product disclosure document, or making a recognised offer, to a retail client in relation to a product unless a target market determination has been made and

• engage in retail product distribution conduct where the target market determination may no longer be appropriate.

The distribution obligations require that person to:

• take reasonable steps so that retail product distribution conduct is consistent with the target market determination

• collect information specified by the issuer, and complaints related to the distribution of a product, and provide them to the issuer and

• notify the issuer of a product of any significant dealings in the product that are not consistent with the product’s target market determination.

Product intervention powers

The amendments give ASIC a product intervention power for both financial products and credit products where there is a risk of significant consumer detriment.

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Purpose of the Bill The purpose of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 (the Bill) is to:

• amend the Corporations Act 2001 to introduce design and distribution obligations in relation to financial products and

• amend the Corporations Act and the National Consumer Credit Protection Act 2009 (Consumer Credit Act) to give the Australian Securities and Investments Commission (ASIC) a product intervention power.

Structure of the Bill The Bill has two Schedules:

• Schedule 1 sets out the amendments to the Corporations Act necessary to introduce design and distribution obligations in relation to financial products and

• Part 1 of Schedule 2 sets out the amendments to the Corporations Act and the Consumer Credit Act to insert a product intervention power; Part 2 of Schedule 2 contains consequential amendments to the Australian Securities and Investments Commission Act 2001 (ASIC Act).

Background

Measure 1—design and distribution obligations The final report of the 2014 Financial System Inquiry (FSI) made a number of recommendations to improve the financial system in order to better meet the needs of individual Australians.1

Relevant to this Bills Digest, the FSI recognised that the current framework relies heavily on disclosure, financial advice and financial literacy. However, disclosure can be ineffective. Consumers may not seek advice at all, or may receive poor-quality advice:

Many products are also distributed directly to consumers.

Such issues have contributed to consumer detriment from financial investment failures, such as Storm Financial, Opes Prime, Westpoint, agribusiness schemes and unlisted debentures, which have affected more than 80,000 consumers. Losses from these failures totalled more than $5 billion, or $4 billion after compensation and liquidator recoveries.

2

According to the FSI, ‘poor product design and distribution practices that disregarded consumer behavioural biases and information imbalances’ played a significant role in causing those losses.3

ASIC report In making its recommendations, the FSI took note of, amongst other things, a January 2014 report by the ASIC entitled Regulating Complex Products.4 That report sets out the problem to be addressed as follows:

Being more complex does not necessarily mean that a product is more risky. Likewise, a product could be relatively simple for an investor to understand, in terms of its features and structure, but still pose a high degree of risk. However, complexity can make it more difficult for investors to evaluate the level of

1. Financial System Inquiry (FSI), Financial systems inquiry: final report, The Treasury, November 2014, p. 193. 2. Ibid., p. 199. 3. Ibid.

4. Australian Securities and Investments Commission (ASIC), ‘Regulating complex products’, ASIC website.

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risk posed by a financial product, and decide whether they are prepared to tolerate it, given the expected returns. 5

Options Accordingly, the FSI took the view that the framework should promote the targeting of products to those consumers who would benefit from them and that this would reduce the incidence of consumers buying products that do not match their needs. To this end the FSI considered three options:

1. introduce a targeted product design and distribution obligation

2. introduce individual appropriateness test at point of sale for complex products and

3. implement a new obligation through a fully self-regulatory approach by setting expectations for industry and monitoring their progress, with regulatory follow-up if progress is not made.6

The FSI’s preferred option was option 1,7 on the grounds that it would ‘deliver benefits to industry, including strengthening internal risk management for product design’.8

The amendments in Schedule 1 of the Bill implement this proposal.

Measure 2—product intervention powers

Rectifying consumer detriment Currently, ASIC can only take action to rectify consumer detriment after a breach or suspected breach of the law by a firm. In addition, it can only take enforcement action against conduct causing consumer detriment on a firm-by-firm basis, even where the problem is industry-wide. Australia has had cases of significant consumer detriment where there was no basis upon which ASIC could take enforcement action.9 These include:

• mortgage managed investment schemes (MISs), where close to 100 were frozen in the market downturn during the global financial crisis.10 In that case, many consumers did not expect an investment of this type to be illiquid11

• unlisted debenture investments, such as Banksia Securities, where many consumers thought the products they bought were equivalent to bank term deposits.12

Responding to emerging risks In addition, there have been cases where ASIC lacked the authority to respond effectively and in a timely way to an emerging risk of consumer detriment.13 For example:

• agribusiness schemes, where the product did not perform in the way that consumers were led to believe, including schemes relying on ongoing sales to fund their operations. Many

5. ASIC, Regulating complex products, Report 384, January 2014, p. 15. 6. FSI, Financial systems inquiry: final report, op. cit., p. 201. 7. Ibid., recommendation 21, p. 198. 8. Ibid., p. 203. 9. L Walsh, ‘Safety net fails again’, The Courier Mail, 8 July 2013, p. 22; P Durkin, ‘Same story, different characters in latest

collapse’, The Australian Financial Review, 25 January 2013, p. 11. 10. Explanatory Memorandum, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, p. 64. See also: A Main, ‘Managed investment scheme is a shonky saga of dud scrub’, The Australian,

15 October 2014, p. 22; S Danckert, ‘Banks unsure of Timbercorp scheme losses’, The Sydney Morning Herald, 7 August 2015, p. 23. 11. S Danckert, ‘Liquidators slap Timbercorp investors with bankruptcy notices’, The Sydney Morning Herald, 16 May 2015, p. 3. 12. G Wilkins, ‘Banksia’s fall raises regulation issues’, The Sydney Morning Herald, 3 November 2012, p. 6; M Drummond, ‘Banksia customers start to get their money back’, The Australian Financial Review, 8 December 2012, p. 9. 13. FSI, Financial systems inquiry: final report, op. cit., p. 208.

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consumers did not understand the potential risk of borrowing to invest in these products.14 In total, more than 65,000 consumers invested and lost close to $3 billion15 and

• financial collapses that involved poor distribution practices, such as Storm Financial and Opes Prime.16 More than 3,000 consumers lost more than $1.4 billion, of which around half was recovered.17

The FSI recognised that consumer confusion may arise even where financial products are not complex. It opined that ‘targeted early intervention would be more effective in reducing harm to consumers than waiting until detriment has occurred’.18

Options Again, in response to the identified problem, the FSI considered three options:

1. introduce a product intervention power

2. introduce default products for a range of basic financial needs; for example, deposits, home and contents insurance and basic investments and

3. prohibit distribution of certain classes of non-mainstream products to retail consumers.

The FSI’s preferred option was option 1,19 on the grounds that it would ‘reduce consumer detriment and rebuild consumer confidence and trust in the financial system in the longer term’.20

The amendments in Schedule 2 of the Bill implement this proposal.

Government response The Government released its response to the FSI in October 2015 and committed to strengthen APRA’s regulatory framework to increase financial sector resilience:

Australia’s financial sector regulatory framework needs to be stronger than those of comparable economies. The resilience measures will ensure the banking system is more stable by holding more capital, and will address risk weights, leverage, loss absorbency and regulators’ crisis management powers.

21

On 13 December 2016, the Minister for Revenue and Financial Services, Kelly O’Dwyer, announced that consultation would commence to provide stakeholders with an indication of how these two measures could operate in practice and that the Government would:

… undertake extensive consultation on the proposals to ensure the final policy strikes the right balance between increasing consumer protections without imposing an undue burden on industry or stifling innovation. 22

14. See for example, Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into aspects of agribusiness managed investment schemes, Canberra, 7 September 2009. 15. FSI, Financial systems inquiry: final report, op. cit., p. 208. 16. See for example, Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and

services in Australia, Canberra, November 2009, chapters 3 and 4. 17. FSI, Financial systems inquiry: final report, op. cit., p. 208. 18. Ibid., p. 209. 19. Ibid., recommendation 22, p. 206. 20. Ibid., p. 212. 21. Australian Government, Improving Australia’s financial system: Government response to the financial system inquiry, 2015,

p. 4.

22. K O’Dwyer (Minister for Revenue and Financial Services), Increasing the accountability of financial product issuers and distributors, media release, 13 December 2016.

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Consultation The consultation process took place in three stages:

• first, a proposals paper sought feedback on the implementation of the two measures arising from recommendations 21 and 22 of the FSI.23 The purpose of the proposals paper was to outline proposals to illustrate how the measures could operate in practice

• second, an exposure draft of the proposed legislation was circulated for comment.24 This occurred from 21 December 2017 to 9 February 201825 and

• finally, a revised exposure draft of the proposed legislation was circulated for comment.26 This occurred from 18 July 2018 to 15 August 2018.27

The provisions of the Bill as introduced are somewhat different to those in the exposure draft. Where those differences are significant they will be highlighted under the heading ‘Key issues and provisions’ below.

Royal Commission The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established on 14 December 2017.28 In his interim report of 28 September 2018, Commissioner Hayne acknowledged that legislation which would improve the design and distribution of financial products had been introduced recognising that ‘current disclosure requirements are not, on their own, sufficient to fully inform consumers’.29

Committee consideration

Senate Standing Committee on Economics On 20 September 2018 the Bill was referred to the Senate Standing Committee on Economics (Economics Committee) for inquiry and report by 9 November 2018.30 The Economics Committee received 19 submissions.

The Economics Committee published its report on 9 November 2018.31 The report recommended that the Bill be passed.32

However, the Australian Labor Party (Labor) Senators on the Economics Committee made additional comments noting that a number of issues had been raised during the inquiry process as follows:

23. Treasury, ‘Design and distribution obligations and product intervention power: proposals paper’, December 2016, Treasury website. 24. K O’Dwyer (Minister for Revenue and Financial Services), Improving outcomes for financial consumers: design and distribution obligations and product intervention power, media release, 21 December 2017. 25. Treasury, ‘Design and distribution obligations and product intervention power: draft legislation’, Treasury website. Treasury

received 41 submissions in response to this round of consultation, of which five were received in confidence. 26. Treasury, ‘Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Power) Bill 2018’, Treasury website. 27. Treasury received 34 submissions in response to the second round of consultation on the Bill, of which four were received in

confidence. 28. Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission), Homepage, Royal Commission website. 29. Royal Commission, ‘Interim report’, Royal Commission website, p. 105. 30. The terms of reference, submissions to the Senate Economics Committee and the report of the inquiry (when published) are

available on the inquiry homepage. 31. Standing Committee on Economics, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 [Provisions], Senate, Canberra, 9 November 2018. 32. Ibid., p. 18.

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• in relation to the design and distribution obligations:

- calls to extend the obligations to all products regulated by the ASIC Act33 - calls to extend the obligations to credit products34 - need to improve remedies35 - concerns about non-target market determinations36 and • in relation to the product intervention powers:

- the range of products covered37 - shortfalls in consumer redress provisions38 and - outsourcing of the drafting of the legislation.39 The Labor Senators, whilst not disagreeing with the overall recommendation that the Bill be passed, made the following additional recommendations:

• amend the Bill so that both design and distribution obligations and product intervention powers apply to all financial products specified in the ASIC Act

• consider amending the Bill so that design and distribution obligations apply to credit products defined in the National Consumer Credit Protection Act

• amend the Bill to provide a further private cause of action where an entity fails to make a target market determination and

• amend the Bill so that ASIC be given standing under the design and distribution obligation regime to seek compensation on behalf of affected consumers who are non-parties to the legal proceedings.40

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills Committee (Scrutiny of Bills Committee) commented on the Bill in its Scrutiny Digest of 17 October 2018.41 The Committee’s concerns which relate to the use of delegation of legislative power are discussed in detail under the heading ‘Key issues and provisions’ below.

Policy position of non-government parties/independents Labor’s Shadow Minister for Financial Services, Clare O’Neil has expressed concern that the Bill ‘has been cast too narrowly’ in that the design and distribution obligations do not extend to consumer credit—and in particular to credit cards.42 Ms O’Neil noted that ASIC ‘has asked for buy now, pay later providers to be included’ and that ‘a leading buy now, pay later provider, Afterpay, has actually agreed that it should be brought within the scope of this Bill … yet the government has designed a Bill that specifically carves them out’.43

33. Ibid., p. 19. 34. Ibid., p. 20. 35. Ibid., p. 21. 36. Ibid., p. 22. 37. Ibid., p. 23. 38. Ibid., p. 24. 39. Ibid., p. 25. 40. Ibid., p. 27. 41. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 12, 2018, 17 October 2018, pp. 50-52. 42. C O’Neil, ‘Second reading speech: Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention

Powers) Bill 2018’, House of Representatives, Debates, (proof), 24 October 2018, p. 93. 43. Ibid.

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Labor MP, Matt Thistlethwaite, stated in relation to the Bill: ‘… it has been rushed, including regarding the buy now, pay later providers and having a look at whether or not they should be brought within the scope of the Bill’.44

Independents and Members of minor parties had not made statements about the Bill at the time of writing this Bills Digest.

Position of major interest groups

Design and distribution obligations In relation to the design and distribution obligations, submitters to Treasury in response to the revised exposure draft of the Bill supported the intent of the Bill and gave it qualified support.45 Of the two measures set out in the Bill, the design and distribution obligations are by far, the most contentious.

Some submitters pointed to certain products which they considered should not be subject to the obligations.46 For instance, the Customer Owned Banking Association stated that it considered:

… absolutely no policy case has been made to extend [the design and distribution obligations] to basic deposit products.

…the fundamental problem that the proposed [design and distribution obligations] seek to address reflects adverse outcomes from large scale financial investment failures, and poor advice, associated with complex financial products—the adverse outcomes are not associated with basic deposit products.

47

ANZ agreed stating that some ‘deposit products are likely to be suitable for such a wide target market that no meaningful distribution conditions could be attached to them’.48

Insurers are generally concerned about how the requirement for a target market determination will affect renewals of insurance contracts.49

Product intervention powers Submitters to Treasury were ‘broadly supportive’ of this measure but expressed concern about certain aspects, such as the penalties to be imposed50 and the method of determining the point at which the intervention power may be triggered.51

44. M Thistlethwaite, ‘Second reading speech: Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018’, House of Representatives, Debates, (proof), 24 October 2018, p. 98. 45. For instance, Australian Banking Association, Submission to Treasury, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018: exposure draft, 15 August 2018, p. 1; IG, Submission to Treasury,

Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018: exposure draft, 15 August 2018, p. 1. 46. See also Allens Linklaters, Submission to Treasury, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018: exposure draft, 15 August 2018, p. 1, which argues that hybrid securities issued by

APRA-regulated entities should be excluded. 47. Customer Owned Banking Association, Submission to Treasury, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018: exposure draft, 14 August 2018, pp. 1-2. 48. ANZ, Submission to Treasury, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention

Powers) Bill 2018: draft legislation, 15 August 2018, p. 5; See also Australian Banking Association, Submission to Treasury, op. cit., p. 1. 49. Allianz, Submission to Treasury, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, 15 August 2018, p. 6. 50. Association of Financial Advisers (AFA), Submission to Treasury, Treasury Laws Amendment (Design and Distribution

Obligations and Product Intervention Powers) Bill 2018, 15 August 2018, pp. 6-7.

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Further comments Further comments by stakeholders in relation to specific issues in both measures are canvassed under the heading ‘Key issues and provisions’ below.

Financial implications According to the Explanatory Memorandum, the measures in the Bill will have nil financial impact.52

However, in relation to the design and distribution obligations, the Regulatory Impact Statement provides that ‘the increase in annual compliance costs for the industry as a whole will amount to $94.7m’.53

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.54

Parliamentary Joint Committee on Human Rights In its report of 17 October 2018, the Parliamentary Joint Committee on Human Rights noted that the Bill did not raise human rights concerns.55

Schedule 1—key issues and provisions

Penalties and offences in the Corporations Act A failure to observe a provision of the Corporations Act is referred to as a contravention. About offences in the Corporations Act In the case of some provisions, a contravention is an offence. An offence is a contravention punishable by the criminal sanctions of imprisonment or fine (pecuniary penalty). Subsection 1311(1) of the Corporations Act has the effect that a person who does something forbidden by a provision of the Corporations Act, or fails to do something required by a provision, or otherwise contravenes a provision, is guilty of an offence—unless there is an express stipulation to the contrary. The maximum penalty for the offence is set out in Schedule 3 to the Corporations Act, which details in table form pecuniary penalties and/or terms of imprisonment for contraventions of specified provisions. Section 1312 of the Corporations Act operates so that where a body corporate is convicted of an offence, the penalty that the court may impose is a fine not exceeding five times the maximum amount that could be imposed as a pecuniary penalty for that offence. Section 1314 provides that offences under the Corporations Act are continuing offences.56

51. Australian CFD and FX Forum, Submission to Treasury, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018: revised draft legislation, 15 August 2018, p. 3. 52. Explanatory Memorandum, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, p. 3. 53. Ibid., p. 63. 54. The Statement of Compatibility with Human Rights can be found at pages 69-77 of the Explanatory Memorandum to the Bill. 55. Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 11, 2018, 16 October 2018, p. 72.

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About civil penalties in the Corporations Act In addition to offences, the Corporations Act contains civil penalty provisions. A civil penalty is assessed by reference to the seriousness of the contravention rather than by reference to the quantum of loss or profits flowing from the contravention. In civil penalty proceedings the court may relieve a person either wholly, or partly, from a liability if the person has acted honestly and having regard to all the circumstances of the case, the person ought fairly to be excused for the contravention.57 A civil penalty is an amount owing to the Commonwealth and payable to ASIC on the Commonwealth’s behalf. It is treated as a civil judgment debt.58 The debt becomes payable as a result of proceedings brought by ASIC in a civil court. Civil penalties provide an additional or alternative enforcement option, especially where there may be difficulty in proving the necessary fault element to establish a criminal offence. This Bill creates a range of new offences under subsection 1311(1) of the Corporations Act for failures to comply with the design and distribution obligations. Failures to comply may also give rise to civil penalties.

Updating penalties The Australian Banking Association was critical of what it described as ‘the indiscriminate application of criminal offence provisions for all contraventions in the Bill’ on the grounds that this is not consistent with long-standing Commonwealth policy on the framing of penalty provisions:59

While it is arguable that the more serious contraventions in the package such as failing to make a target market determination could, due to their capacity to cause widespread harm, justify a criminal sanction, this is far less clear in relation to other provisions. 60

On 19 October 2016, the Government established the ASIC Enforcement Review Taskforce. The Taskforce was established in response to a recommendation of the FSI.61

The Taskforce was asked to review the enforcement regime available to ASIC and assess the suitability of the existing regulatory tools ASIC uses to perform its functions. The Taskforce recommended, amongst other things, that penalties for corporate and financial sector misconduct should be strengthened.62 Accordingly, the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 (the Penalties Bill) was introduced into the House of Representatives on 24 October 2018. The purpose of the Penalties Bill is to introduce a stronger penalty framework including, amongst other things, by updating the maximum penalties for certain offences in ASIC administered legislation.63 At the time of writing this Bills Digest the Penalties Bill had been debated in the House of Representatives, introduced into the Senate but not been the subject of debate in that Chamber.

56. Under subsection 4K(2) of the Crimes Act 1914, a person is guilty of a separate offence for each day of non-compliance, where an act or thing must be done within a particular period or before a particular time, and failure to comply is an offence. This is referred to as a continuing offence. Continuing offences provide a strong incentive for compliance with a continuing obligation following an initial contravention.

57. Corporations Act, section 1317S. 58. Corporations Act, subsection 1317G(2). 59. Australian Banking Association, Submission to Treasury, op. cit., pp. 5-6. 60. Ibid. 61. Treasury, ‘ASIC Enforcement Review’, Treasury website. 62. Australian Government, ASIC enforcement review taskforce report, Treasury, 18 December 2017, recommendations 32-45,

pp. xvi-vii. 63. Explanatory Memorandum, Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018.

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In the House of Representatives, Milton Dick indicated Labor’s broad support for the Penalties Bill stating:

This is a necessary reform. This will help to prevent the outrageous situation that we currently have where companies can make hundreds of millions of dollars, even billions of dollars, through breaking the law and then pay minuscule penalties. This current system is unjust and goes against community expectations of how our corporate sector operates.

64

Importantly the relevant penalties imposed in this Bill are consistent with those proposed by the Penalties Bill.

Nature of the design and distribution obligations The design obligations are:  to make a publicly available target market determination  to review the target market determination as required to ensure it remains appropriate  to keep records of the person’s decisions in relation to the design obligations and  to notify ASIC of any significant dealing in a product that is not consistent with the product’s

target market determination. The distribution obligations require that a distributor does not:  engage in dealing, providing financial product advice, giving a product disclosure document,

or making a recognised offer, to a retail client in relation to a product unless a target market determination has been made and  engage in retail product distribution conduct where the target market determination may no longer be appropriate. In addition a distributor must:  take reasonable steps so that retail product distribution conduct is consistent with the target

market determination  collect information specified by the issuer, and complaints related to the distribution of a product, and provide them to the issuer and  notify the issuer of a product of any significant dealings in the product that are not consistent

with the product’s target market determination.

Making a target market determination Item 5 in Schedule 1 to the Bill inserts proposed Part 7.8A—Design and distribution requirements relating to financial products for retail clients into the Corporations Act. Within new Part 7.8A, proposed section 994B relates to the making of a target market determination. This is the first of the design obligations.

The Corporations Act already imposes disclosure obligations on certain elements of the financial services sector. As a general rule, a public company offering securities for sale (for example, shares or debentures) must provide a disclosure document to potential investors65 by way of:

• a prospectus

• an offer information statement

• a profile statement and

64. M Dick, ‘Second reading speech: Treasury Laws Amendment (Strengthening Corporate and Fi9nancial Sector Penalties) Bill 2018’, House of Representatives, Debates, 28 November 2018, p. 102. 65. Australian Securities and Investments Commission (ASIC), ‘What disclosure documents do you need to give potential investors when raising funds?’, ASIC website.

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• a two-part simple corporate bonds prospectus.66

Offerors are persons such as insurers and asset managers.

In addition, the Corporations Act requires a Product Disclosure Statement (PDS) to be prepared by, or on behalf of, the issuer or seller of the financial product.67 A PDS must contain sufficient information so that a retail client may make an informed decision about whether to purchase a financial product.68

Proposed subsection 994B(1) of the Corporations Act requires those persons who must give a disclosure document or provide a PDS to also make a target market determination. Regulations may specify another person who is to make a target market determination for a product.

According to the Explanatory Memorandum to Bill:

The design obligations are imposed on the person who is responsible for developing the financial product. This is the person who is responsible for preparing the disclosure document. 69

This Bills Digest will refer to a person who must make a target market determination as an issuer. This term is not used in the Bill but is consistent with the language of the Explanatory Memorandum. It may assist those persons who are not familiar with the technical terms used in the Corporations Act to understand who bears the responsibilities which will be imposed by the Bill.

What is excluded There are some exceptions to this rule. Proposed subsection 994(3) of the Corporations Act provides that the requirement for a target market determination does not apply to:

• a MySuper product70

• a margin lending facility71

• a security that has been or will be issued under an employee share scheme

• a fully paid ordinary share in a company or a foreign company (with some specific exceptions) or

• a financial product issued, or offered for regulated sale, by an exempt body72 or an exempt public authority.73

In addition, regulations may also prescribe a financial product which is exempt from the requirement for a target market determination.

66. Corporations Act, Part 6D.2. 67. Corporations Act, section 1013A. 68. Corporations Act, section 1013D. 69. Explanatory Memorandum, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention

Powers) Bill 2018, p. 15. 70. Proposed section 994A in Schedule 1 to the Bill provides that the term MySuper product has the same meaning as in the Superannuation Industry (Supervision) Act 1993. 71. A margin loan lets you borrow money to invest and uses your shares or managed funds as security. It can help you increase

your returns but it can also magnify your losses. Margin loans are for dedicated investors who actively monitor and manage their investments. Source: ASIC, ‘Margin loans’, Money Smart website. 72. Corporations Act, section 66A provides that a body corporate is an exempt body of a state or territory if, and only if, it is not a company; and is incorporated by or under a law of the state or territory. 73. Corporations Act, section 9 defines an exempt public authority as a body corporate that is incorporated within Australia or an

external territory and is: a public authority; or an instrumentality or agency of the Crown in right of the Commonwealth, in right of a state or in right of a territory.

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Proposed regulations The Government circulated the Corporations Amendment (Design and Distribution Obligations and Product Intervention Powers) Regulations 2018 in draft form for consultation on 23 October 2018. Products to be excluded The draft Regulations would operate to exclude a number of products from the requirement for a target market determination being:  an interest in eligible rollover funds within the meaning of the Superannuation Industry

(Supervision) Act 1993  a defined benefit interest within the meaning of the Superannuation Industry (Supervision) Regulations 1994  a medical indemnity insurance product  a depository interest in foreign fully paid ordinary shares in relation to which, if they were

offered directly to retail clients, Part 7.8A of the Corporations Act would apply.74

The exclusion of defined benefit interests from the requirement for a target market determination will no doubt ease the concerns of UniSuper, which has consistently argued that defined benefit superannuation schemes should be excluded from the design and distribution obligations. UniSuper’s position is that such schemes are ‘quite different to retail financial products and need to be treated equivalently to other default superannuation products such as MySuper’ which have been exempted from the obligations.75

Nevertheless it is unclear why products such as MySuper will be exempted by the operation of the Bill whilst defined benefit funds will be exempted by regulation.

There have been calls from some submitters to also exclude hybrid securities from the design and distributions obligations.76 The Australian Banking Association explained the perceived problem as follows:

Each bank, as an APRA regulated entity is required to issue a certain amount of regulatory capital in the form of additional Tier 1 and Tier 2 securities (known as ‘hybrid securities’) and common equity (that is, ordinary shares) in order to safeguard depositors and promote financial services system stability. The structure, terms and features of hybrid securities are designed in compliance with APRA’s prudential standards for additional tier 1 or Tier 2 capital. There is little flexibility to change product features to accommodate issuer or investor preference. In recent years the ASX-listed market has been an important source of additional Tier 1 and Tier 2 capital raising for the Australian banks. Potentially restricting the target market for issuance of hybrid securities, could impact the ability of the banks to comply with their regulatory capital requirements.

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However, they have not been excluded either in the Bill itself or by the draft regulations. The Regulatory Impact Statement gives some explanation for the inclusion of hybrid securities in the design and distributions regime—that is, some consumers acquire structured products that are riskier than they realise and some firms distributing hybrid securities include sales information in

74. Corporations Amendment (Design and Distribution Obligations and Product Intervention Powers) Regulations 2018 (draft), section 7.8A.03. 75. UniSuper, Submission to Treasury, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018: exposure draft, 14 August 2018, p. 2. 76. For example, Allens Linklaters, Submission to Treasury, op. cit., p. 1. 77. Australian Banking Association, Submission to Treasury, op. cit., p. 3.

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addition to, or inconsistent with, the information in the prospectus. ‘This information tended to emphasise high yield while downplaying risk’.78

Use of delegated legislation ASIC is empowered by proposed section 994L to:

• make notifiable instruments79 which would exempt a specified person or financial product from all or specified provisions of new Part 7.8A, or to declare that Part 7.8A applies to a specified person or financial product as if provisions of that Part were omitted, modified or varied80 and

• make legislative instruments81 which would exempt a specified class of persons or financial products from all or specified provisions of new Part 7.8A, or to declare that Part 7.8A applies to a specified class of persons or financial products as if provisions of that Part were omitted, modified or varied.82

Scrutiny of Bills Committee The Scrutiny of Bills Committee was highly critical of the use of delegated legislation stating:

The Committee will also have concerns about provisions that enable delegated legislation to exempt persons or entities from the operation of primary legislation, particularly where such provisions permit exemptions or modifications that apply to a broad range of entities or legislative provisions. This is because provisions of this kind may have the effect of limiting, or in some cases removing, parliamentary scrutiny.

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That said, the Committee considered the rationale for the use of delegated legislation set out in the Explanatory Memorandum to the Bill. However the Scrutiny of Bills Committee remained unpersuaded stating:

The Committee notes that the proposed powers are intended to ensure that ASIC is able to tailor the operation of the new design and design and distribution regime so as to avoid any unintended consequences. However, the Committee notes that it does not generally consider administrative flexibility, or consistency with other legislation, to be sufficient justification for broad delegations of legislative power (such as the power for delegated legislation to modify the operation of primary legislation). The Committee is also concerned that the Bill does not appear to set any limitation on ASIC's powers of modification and exemption. For example, the Bill does not set out any conditions that must be satisfied before such powers are exercised.

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Key issue—extent of regulatory capture In the context of the comments by the Scrutiny of Bills Committee it is understandable that some submitters are concerned about whether they will be required to prepare a target market determination for all or only some of the products they offer. For instance, Allianz Australia

78. Explanatory Memorandum, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, p. 60. 79. Under section 7 of the Legislation Act 2003, notifiable instruments are not subject to parliamentary scrutiny, nor are they subject to automatic repeal ten years after registration. 80. Corporations Act, proposed subsection 944L(1). 81. Under section 38 of the Legislation Act, legislative instruments must be tabled in each House within six sitting days following

registration on the Federal Register of Legislation. A legislative instrument can be subject to disallowance if either a Senator or Member of the House of Representatives moves a motion of disallowance within 15 sitting days of the day that the legislative instrument is tabled. The motion to disallow must be resolved or withdrawn within a further 15 sitting days of the day that the notice of motion is given 82. Corporations Act, proposed subsection 944L(2). 83. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 12, 2018, op. cit., p. 51. 84. Ibid.

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Insurance Limited (Allianz) notes that a PDS is required for general insurance products.85 That being the case, under proposed paragraph 994B(1)(b) a target market determination must be made.

However, uncertainty arises for insurers where there are a number of different covers within a single contract. In that case, the PDS requirements are typically considered to only apply to the retail cover part of the contract, not the whole contract. According to Allianz:

Clarification is required as to the intent in relation to these policies. It is not clear whether the intent is for the TMD obligations to apply to all covers that is, the retail and non-retail covers.

If both, insurers will need to create separate offerings ie offer retail covers separately from the wholesale covers. This would require extensive and very costly modifications to systems resulting in substantial costs to the insurer and complexity for consumers. In addition, purchasing the component covers separately could further increase the cost to customers.

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ANZ was also concerned about the extent of regulatory capture. It questioned the rationale for extending the requirement for a target market determination to products such as basic deposit products—on the grounds that ‘simple deposit products are likely to be suitable for such a wide target market that no meaningful distribution conditions could be attached to them’.87

Similarly the Australian Institute of Superannuation Trustees (AIST) is concerned that the Bill does not cover all the key entities which create and distribute products. That is, ‘investment management companies and product providers, which in turn provide information to platforms’ are exempted from ensuring that the products they develop and sell are suitable.88

When a determination is to be made The Bill introduces the term retail product distribution conduct in relation to a financial product. This includes any of the following:

• dealing in the product in relation to a retail client89

• giving a disclosure document in relation to an offer of the product to a retail client

• giving a PDS for the product to a retail client or

• providing financial product advice in relation to the product to a retail client.90

A target market determination for a financial product must be made before there is retail product distribution conduct (as set out above) in relation to the product.91

85. Allianz, Submission to Treasury, op. cit., pp. 3-4. See also Insurance Council of Australia, Submission to Treasury, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018: exposure draft, 15 August 2018, op. cit., p. 1 which expresses concern about how the design and distribution obligations are intended to operate generally for mass market products.

86. Ibid. 87. ANZ, Submission to Treasury, op. cit., p. 5. 88. Australian Institute of Superannuation Trustees (AIST), Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018,

[Submission no. 12], 18 October 2018, p. 2. 89. The meaning of the term dealing is set out in section 766C of the Corporations Act. It encompasses applying for or acquiring a financial product; issuing a financial product; for securities or managed investment schemes, underwriting the securities or

interests; varying a financial product; or disposing of a financial product. However, for the purposes of proposed Part 7.8A, the meaning is modified so that it does not refer to varying or disposing of a financial product—see definition of dealing in proposed subsection 994A(1) of the Corporations Act at item 5 of Schedule 1 to the Bill. 90. Corporations Act, proposed section 994A. 91. Corporations Act, proposed paragraph 994B(2)(a).

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In the alternative, where a regulation specifies that a person who is specified in the regulations is to make a target market determination, it must be made before the time or event specified in the regulation. Where no time or event is specified, the target market determination must be made before any person engages in retail product distribution conduct in relation to the product.92

A failure to make a target market determination as above gives rise to an offence. Item 9 of the Bill amends Schedule 3 of the Corporations Act so that the maximum penalty is 200 penalty units or imprisonment for five years, or both.93 Proposed subsection 994B(2) is also a civil penalty provision as reflected in amendments made by item 8 of Schedule 1 to the Bill to the table in subsection 1317E(1) of the Corporations Act.

Key issue—when retail product distribution conduct occurs A number of submitters to the Economics Committee have drawn attention to the definition of retail product distribution conduct. For instance Australian Super states:

It appears that the Bill is intended to apply to conduct that occurs before a retail client acquires a financial product. The definition of ‘retail product distribution conduct’ may seem to have a broader application however and potentially covers a range of activities that would normally and legitimately transpire after a retail client has acquired a financial product. This would include, for example, varying an interest in a financial product, providing general advice or even a ‘refresher’ PDS to an existing superannuation fund member.

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ANZ believes that there is a need for further clarity on this matter.95 The Law Council of Australia also considers that there is a flaw in the drafting of the definition:

The apparent error relates to the obligations concerning the distribution of financial products … As is suggested by the term ‘distribution’, the apparent policy intention is that the obligations will apply to conduct occurring before a relevant financial product is acquired by a retail client, but not to conduct occurring after the product has been acquired by the retail client. This description of the apparent policy intention is borne out by a review of the Explanatory Memorandum (EM), including the reference at paragraph 1.80 of the EM to ‘potential investors’. However, as currently drafted the Bill would give the distribution obligations an operation that extends well beyond the apparent policy intention.

96

In order to bring the drafting of the term retail product distribution conduct into line with the policy intention, an amendment would be required.

Contents of the determination Proposed subsection 994B(5) of the Corporations Act lists the features of a target market determination for a financial product.97 The target market determination must be in writing.98 It must:

92. Corporations Act, proposed paragraph 994B(2)(b). 93. Under subsection 4AA of the Crimes Act 1914, a penalty unit is equivalent to $210. This means the maximum penalty is $42,000. 94. Australian Super, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment

(Design and Distribution Obligations and Product Intervention Powers) Bill 2018, [Submission no. 16], 22 October 2018, p. 1. 95. ANZ, Submission to Treasury, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018: exposure draft, op. cit., p. 4. 96. Law Council of Australia, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws

Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, [Submission no. 18], 24 October 2018, p. 1. 97. Corporations Act, proposed subsection 944B(9) provides that a target market determination must be available to the public free of charge. 98. Corporations Act, proposed paragraph 994B(5)(a).

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• set out the class of retail clients in the target market99

• set out any conditions on the distribution of the product (called a distribution condition)100

• specify the circumstances that are likely to trigger a review (called review triggers) about whether the determination remains appropriate101

• specify the maximum period from the day the determination is made to the day the first review of the target market determination is to finish102

• specify the maximum period from the day a review of a target market determination is finished to the day that the next review of the determination is to finish and

• specify:

- the period within which complaints about a financial product are to be reported to the issuer—referred to in this Bills Digest (but not in the Bill) as the complaints reporting period103

- the kinds of information needed by an issuer to identify whether a review trigger or another event has occurred which would reasonably suggest that the target market determination may no longer be appropriate—and the period within which that information must be reported to the issuer.104 This Bills Digest (but not the Bill) refers to this as the other information reporting period. Importantly the complaints reporting period and the other information reporting period are aligned to the record keeping and notification requirements elsewhere in the Bill.

The first review and next review periods and the reporting periods which are specified in the target market determination must be reasonable.105 In determining what is reasonable in that context the following are to be considered:

• the need to identify promptly whether an event has occurred which would reasonably suggest that the determination is no longer appropriate and if so

• the likelihood, nature and extent of detriment to retail clients if the target market determination is not promptly reviewed.106

Determinations must be appropriate As stated above, a target market determination must be, and must remain, appropriate. The appropriateness of a target market determination is measured by whether it would be reasonable to conclude that if the product were to be issued, or sold in a regulated sale:

• to a retail client in accordance with the distribution conditions—it would be likely that the retail client is in the target market and

• to a retail client in the target market—it would likely be consistent with the likely objects, financial situation and needs of the retail client.107

The Bill requires an issuer to make a target market determination available to the public free of charge. A failure to do so gives rise to an offence. Item 9 of Schedule 1 to the Bill amends

99. Corporations Act, proposed paragraph 994B(5)(b). 100. Corporations Act, proposed paragraph 994B(5)(c). 101. Corporations Act, proposed paragraph 994B(5)(d). 102. Corporations Act, proposed paragraph 994B(5)(e). 103. Corporations Act, proposed paragraph 994B(5)(g). 104. Corporations Act, proposed paragraph 994B(5)(h). 105. Corporations Act, proposed subsection 994B(6). 106. Corporations Act, proposed subsection 994B(7). 107. Corporations Act, proposed subsection 994B(8).

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Schedule 3 of the Corporations Act so that the maximum penalty is 50 penalty units and/or imprisonment for 12 months.108 Proposed subsection 994B(9) is also a civil penalty provision.

Stakeholder comments To many submitters, the contents of the target market determination were a cause for concern. For instance:

• National Insurance Brokers Association (NIBA) considered that it is likely to be a large document which if publicly available may reveal commercially sensitive information109 and

• the Financial Services Council (FSC) was also concerned about the amount of information in the target market determination and requested that the matter be revisited to determine ‘whether all of these items of information must be included’110

• Allianz stated that it is ‘unlikely that insurers will be able with any certainty, to determine how they can reasonably describe the class of retail clients that comprises the target market for the product’111 and

• ANZ queried the wording of the explanation of the appropriateness of a target market determination on the grounds that it could be interpreted as ‘requiring consideration of the client’s actual objectives, financial situation and needs’.112

In hearings before the Economics Committee a representative of the AIST suggested that the target market determination should also include who was not in the target market:

A product manufacturer is required to say, “This product is aimed at an expert investor who may have been trading in the market for some years,” and, as a counterbalance, the product issuer should say, “If a person is not experienced in financial trading, this product might not be appropriate,” or “if a person has a low tolerance to risk, this product might not being appropriate for them.”

113

The drafting of the matters to be contained in the target market determination is quite dense. It is not immediately clear to the reader what the requirements mean. ASIC will need to ensure that adequate guidance materials are provided to stakeholders to clarify their obligations.

Reviewing the determination Proposed subsection 994C(1) of the Corporations Act authorises an issuer to review the determination or make a new target market determination.

The second design obligation ‘is aimed at minimising the distribution of products which may have an inappropriate target market determination’.114 It requires an issuer to review a target market determination for a financial product:

• during a review period and

108. Under subsection 4AA of the Crimes Act 1914, a penalty unit is equivalent to $210. This means the maximum penalty is $10,500. 109. National Insurance Brokers Association (NIBA), Submission to Treasury, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018: exposure draft, 15 August 2018, p. 8. 110. Financial Services Council (FSC), Submission to Treasury, Treasury Laws Amendment (Design and Distribution Obligations and

Product Intervention Powers) Bill 2018: exposure draft, 15 August 2018, p. 13. 111. Allianz, Submission to Treasury, op. cit., p. 4. 112. ANZ, Submission to Treasury, op. cit., p. 6. 113. D Haynes (Senior Manager Policy, Australian Institute of Superannuation Trustees), Evidence to the Senate Economics

Legislation Committee, Inquiry into Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, 1 November 2018, p. 15. 114. Explanatory Memorandum, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, p. 25.

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• when a review trigger occurs.

The Bill introduces the new term review period being:115

• the maximum period of time that elapses between the making of the determination and finishing the first review and

• the maximum period between completed reviews of a determination.

Under proposed subsection 994C(2) of the Corporations Act an issuer must complete a review of a target market determination for a financial product within the review period.

About regulated persons The term regulated person is defined in proposed section 994A of the Corporations Act. For the purposes of new Part 7.8A a regulated person, in relation to a financial product, means:  the seller of the financial product, if a sale takes place in circumstances described in

subsection 707(2), (3) or (5) or 1012C(5), (6) or (8)—that is a sale offer that needs disclosure under Part 6D.2 of the Corporations Act  a regulated person as defined in section 1011B (modified so that the references to financial products include references to securities) or  a person prescribed, in relation to the product, by regulations. The Bill imposes obligations on regulated persons and, for some of those obligations, provides that persons who are providing personal advice are exempt. This Bills Digest will refer to a regulated person as a distributor. This term is not used in the Bill but is consistent with the language of the Explanatory Memorandum. Where the obligation on a regulated person also includes an obligation on a person providing personal advice this will be clearly stated.

Reviews must also be carried out in response to review triggers so that:

• issuers are prohibited from engaging in retail product distribution conduct in relation to the product, from as soon as practicable (but no later than ten business days) after they knew or ought reasonably to have known that the determination may be inappropriate, until they have reviewed the determination and, if necessary, made a new determination116

• issuers must, as soon as practicable but within ten business days, take reasonable steps to ensure distributors are informed not to engage in retail product distribution conduct in relation to the product unless the issuer has reviewed the determination and, if necessary, made a new determination117 and

• a distributor must, as soon as practicable but within ten business days, cease to engage in retail product distribution conduct when such steps have been taken by the issuer unless, after making all inquiries (if any) that are reasonable in the circumstances, the person believes on reasonable grounds the determination has been reviewed and remade (if necessary).118

Proposed subsections 994C(2) and (5) are both offence and civil penalty provisions. Item 9 in Schedule 1 to the Bill amends Schedule 3 of the Corporations Act so that the maximum penalty for breaching the offence provision in proposed subsection 994C(2) is 50 penalty units or imprisonment for 12 months or both; whilst the maximum penalty for breaching the offence provision in proposed subsection 994C(5) is 200 penalty units or imprisonment for five years or both.

115. Corporations Act, proposed section 994A. 116. Corporations Act, proposed subsections 994C(3) and (4). 117. Corporations Act, proposed subsection 994C(5). 118. Corporations Act, proposed subsections 994C(6) and (7).

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Proposed subsections 994C(3) and (6) are offence provisions. Item 9 in Schedule 1 to the Bill amends Schedule 3 of the Corporations Act so that the maximum penalty for a breach of proposed subsections 994C(3) and (6) is 200 penalty units or imprisonment for five years or both.119

Proposed subsections 994C(4) and (7) of the Corporations Act are civil penalty provisions only.120

Distribution of financial products The first of the distribution obligations is contained in proposed section 994D of the Corporations Act which prohibits a distributor from engaging in retail product distribution conduct in relation to a product for which a target market determination has not been made. The exceptions to this prohibition are:

• where the distributor has made inquiries that are reasonable in the circumstances and, after doing so, believes on reasonable grounds that a target market determination has been made, or is not required or

• the retail product distribution conduct is excluded conduct—that is providing personal advice.121

A failure to comply with proposed section 994D is an offence. Item 9 of Schedule 1 to the Bill amends Schedule 3 to the Corporations Act so that the maximum penalty is 200 penalty units or imprisonment for five years, or both. The section is also a civil penalty provision.

The second of the distribution obligations is contained in proposed section 994E of the Corporations Act. That section requires both an issuer122 and a distributor to take reasonable steps to ensure that the retail product distribution conduct in respect of the product is consistent with the target market determination.123 A failure to comply with this requirement is an offence. Item 9 of Schedule 1 to the Bill amends Schedule 3 to the Corporations Act so that the maximum penalty is 200 penalty units or imprisonment for five years, or both. Proposed subsections 994E(1) and (3) are also civil penalty provisions.124

Importantly, these distribution obligations do not apply to persons giving personal advice.

Reasonable steps A decision about whether an issuer or distributor is taking reasonable steps must take into account all relevant matters, including, but not limited to:

• the likelihood that retail product distribution conduct in relation to the financial product is inconsistent with the determination

• the nature and degree of harm that might result from an issue or regulated sale of the financial product to retail clients who are not in the target market or that is inconsistent with the determination and

• the availability and suitability of ways to eliminate or minimise the likelihood and the harm.125

119. Under subsection 4AA of the Crimes Act 1914, a penalty unit is equivalent to $210. This means the maximum penalty is $42,000 for breaches of proposed subsections 994C (3), (5) and (6) and $10,500 for a breach of proposed subsection 994C(2). 120. Corporations Act, proposed table items 40D and 40E, subsection 1317E(1) (item 8, Schedule 1 of the Bill). 121. Corporations Act, proposed section 994A. 122. Corporations Act, proposed subsection 944E(1). 123. Corporations Act, proposed subsection 944E(3). 124. Corporations Act, proposed table item 40G, subsection 1317E(1) (item 8, Schedule 1 of the Bill). 125. Corporations Act, proposed subsection 994E(5).

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This is an objective test. According to the Explanatory Memorandum the requirement of reasonable steps is evidence of a risk management approach which ‘ensures the obligation is scalable according to the risk associated with an inappropriate distribution of a product and the practicability of mitigating the risk’.126

Stakeholder comments In its submission to the Treasury consultation on the draft of the Bill, law firm Minter Ellison expressed concern about the proposal for product issuers and sellers to ensure the conduct of distributors is consistent with target market determinations:

The proposed regime will have the effect of making issuers responsible for the conduct of distributors, rendering the separate licensing of distributors redundant. This risks returning the industry to the days when distributors were agents of issuers. It undermines the best interest duties recently imposed on personal advisers by the FOFA regime because its takes the responsibility for determining suitability for clients away from advisers and moves it to the product issuer.

127

Record keeping Proposed section 994F of the Corporations Act sets out the record keeping obligations of issuers, distributors and persons giving personal advice.

Issuers must keep complete and accurate records of the decisions which underpin the making of the target market determination and the circumstances in which it is to be reviewed—and the reasons for those decisions.128

The record keeping obligations for distributors also apply to persons giving personal advice.129

The obligations apply if a target market determination has been made for a financial product which is on offer or for sale to retail clients and the distributor (or person giving personal advice) engages in retail product distribution conduct in relation to the product. In that case, the distributor or advisor must keep complete and accurate records of the following information (called distribution information) in relation to the product:

• the number of complaints about the product that he, or she, receives130

• the reasonable steps he, or she, has taken to ensure consistency with the target market determination131

• any information that the distributor is required to report to the issuer as specified in the target market determination under the terms of the determination132 and

• the dates on which the distributor made the relevant report.133

Proposed subsections 994F(4) and (5) of the Corporations Act apply to distributors and persons giving personal advice during the complaints reporting period or the other information reporting period. In each case the distributor and/or advisor must provide information in writing to the

126. Explanatory Memorandum, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, p. 27. 127. Minter Ellison, Submission to Treasury, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018: revised exposure draft, 15 August 2018, p. 1. 128. Corporations Act, proposed subsection 994F(1). 129. Corporations Act, proposed subsection 994F(2). 130. Corporations Act, proposed paragraph 994F(3)(a). 131. Corporations Act, proposed paragraph 994F(3)(b). 132. Corporations Act, proposed paragraph 994F(3)(c) as required by proposed subparagraph 994B(5)(1)(h). 133. Corporations Act, proposed paragraph 994F(3)(d).

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issuer as soon as practicable, but in any case within ten business days, after the end of the relevant reporting period. The subsections require reporting of:

• for complaints—the number of complaints and

• for other information—the information acquired during the reporting period, even if no information was acquired.

In addition, proposed subsection 994F(6) of the Corporations Act imposes a requirement on a distributor and/or person giving personal advice134 to provide a written report to the issuer about a significant dealing in the product if the dealing is not consistent with the target market determination as soon as practicable, and in any case within ten business days.

A failure to comply with each of the requirements in proposed section 994F gives rise to an offence. Item 9 of Schedule 1 to the Bill amends Schedule 3 to the Corporations Act so that the maximum penalty is 50 penalty units or imprisonment for 12 months, or both. These are also civil penalty provisions.135

Notify ASIC of any significant dealings Where an issuer becomes aware of a significant dealing in a financial product which is inconsistent with a target market determination the issuer must give written notice to ASIC as soon as practicable, and in any case within ten business days, after becoming so aware.136

A failure to comply with the requirement in proposed section 994G gives rise to an offence. Item 9 of Schedule 1 to the Bill amends Schedule 3 to the Corporations Act so that the maximum penalty is 100 penalty units or imprisonment for two years, or both.137 This is also a civil penalty provision.138

Key issue—what is a significant dealing The Association of Financial Advisers (AFA) was of the view that there is a ‘complete lack of clarity’ of what significant dealings may involve. In its submission to Treasury, the AFA was unsure whether a dealing should be regarded as significant based on the ‘number of clients or the dollars involved’.139

According to the Explanatory Memorandum to the Bill:

The meaning of significant is intended to take its ordinary meaning in the context of the new provision. Generally, this would require a regulated person to inform an issuer of dealings that would be worthy of their attention having regard to the object of the new regime and the issuer’s role as the product’s designer. However, ultimately whether or not a dealing is significant would be a matter to be determined in the circumstances of each case.

140

134. This is due to the operation of proposed subsection 994F(2), which extends the obligations to certain ‘other regulated persons’ - in this case, a person giving personal advice is captured by the proposed definition of retail product distribution conduct which includes ‘providing financial product advice in relation to the product to a retail client’: Corporations Act, proposed section 994A.

135. Corporations Act, proposed table items 40H, 40J, and 40K, subsection 1317E(1) (item 8, Schedule 1 of the Bill). 136. Corporations Act, proposed section 944G. 137. This means the maximum penalty is $21,000. 138. Corporations Act, proposed section 994A. 138. Corporations Act, proposed table item 40L, subsection 1317E(1) (item 8, Schedule 1 of the Bill). 139. AFA, Submission to Treasury, op. cit., p. 3. 140. Explanatory Memorandum, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention

Powers) Bill 2018, p. 31.

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This obligation applies in relation to regulated persons that provide personal advice, or engage in conduct associated with such advice, in relation to the product. The obligation to report significant dealings is of concern to Allianz:

Brokers providing personal advice are carved out from the retail distribution conduct obligations. If this results in clients purchasing products outside the [target market determination], it is not clear why such regulated persons need to report this to an insurer. It can also give rise to conflicts of interest and breaches of confidentiality if the information reported may not be for the benefit of the customer.

141

ASIC’s powers

Information to be provided to ASIC Proposed section 994H(1) of the Corporations Act provides that ASIC may make a written request for distribution information or records about a financial product from an issuer, a distributor or a person providing personal advice.

In that case, the issuer, distributor and/or advisor must comply with the requirement either by the date specified in the request or in the absence of a specified date, within ten business days after the day the person is notified of the requirement.142

A failure to comply with a written request for information or records by ASIC within the specified time gives rise to an offence.143 Item 9 of Schedule 1 to the Bill amends Schedule 3 to the Corporations Act so that the maximum penalty is 100 penalty units or imprisonment for two years, or both.144 This is also a civil penalty provision.145

Stop orders Where ASIC is satisfied that a provision of proposed sections 994B-994E of the Corporations Act has been contravened it may order that specified conduct in relation to retail clients in respect of the financial product must not be engaged in while the order is in force. The order must be in writing and is not a legislative instrument.146

Once ASIC has served a stop order on a person he, or she, must take all reasonable steps to ensure that other people who engage in conduct to which the order applies are aware of the order.147 A person who has been served with a stop order or is aware of a stop order must not engage in conduct that is contrary to the order.148 A failure to comply with a stop order gives rise to an offence. Item 9 of Schedule 1 to the Bill amends Schedule 3 to the Corporations Act so that the maximum penalty is 100 penalty units or imprisonment for two years, or both. This is also a civil penalty provision.149

141. Allianz, Submission to Treasury, op. cit., p. 8. 142. Corporations Act, proposed subsection 944H(2). 143. Corporations Act, proposed subsection 944H(3). 144. This means the maximum penalty is $21,000. 145. Corporations Act, proposed table item 40M, subsection 1317E(1) (item 8, Schedule 1 of the Bill). 146. Corporations Act, proposed section 944J. 147. Corporations Act, proposed subsection 944J(7). 148. Corporations Act, proposed subsection 944J(8). 149. Corporations Act, proposed table item 40N, subsection 1317E(1) (item 8, Schedule 1 of the Bill).

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The Bill requires ASIC to hold a hearing and provide a reasonable opportunity to any interested person to make submissions before an order is made. Where doing so may be prejudicial to the public interest, ASIC may make an interim stop order which has effect for up to 21 days.150

Civil liability The Bill provides that a person who suffers loss or damage because of the design and distribution obligations may recover that loss by civil action.151

Schedule 2—key issues and provisions Product intervention power  The product intervention power allows ASIC to make a range of orders prohibiting specified conduct in relation to products regulated under the Corporations Act and the Consumer Credit

Act.

 The intervention powers are set out in near equivalent terms—with references to financial products in the Corporations Act substituted for references to credit products in the Consumer Credit Act.

 ASIC must satisfy consultation and notification obligations before a product intervention order is made.  Civil and criminal penalties apply to contraventions of a product intervention order. The proposed enforcement provisions in each of the Acts have been adapted to suit the drafting

and penalties currently imposed by the Corporations Act and the Consumer Credit Act respectively.

Amending the Corporations Act Part 1 of Schedule 2 to the Bill amends the Corporations Act by inserting proposed Part 7.9A— Product intervention orders.152 The new Part sets out the framework for the making and enforcement of those orders.

Part 7.1 of the Corporations Act lists those products which are financial products for the purposes of Chapter 7—Financial Services and Markets. Within Part 7.1, section 764A details specific things that are financial products. Item 4 in Part 1 of Schedule 2 to the Bill inserts proposed subsection 764A(3) into the Corporations Act to allow regulations to declare that a product is a financial product for a specified provision of Chapter 7.

The Corporations Amendment (Design and Distribution Obligations and Product Intervention Powers) Regulations 2018 in draft form (the Draft Regulations) which was circulated on 23 October 2018 provides that each of the following is declared a financial product for new Part 7.9A:

• a funeral expenses policy

• an extended warranty arrangement and

• a short term credit contract.

150. Corporations Act, proposed subsection 944J(4). 151. Corporations Act, proposed section 944M. 152. Item 7 of Part 1 in Schedule 2 to the Bill.

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About short term credit contracts Section 7.9A.01 of the Draft Regulations defines a contract as a short term credit contract if:  credit (within the meaning of the National Credit Code) is or may be provided under the contract and

 the National Credit Code does not apply to the provision of credit. Credit, within the meaning of the National Credit Code is provided if under a contract:  payment of a debt owed by one person (the debtor) to another (the credit provider) is deferred or

 one person (the debtor) incurs a deferred debt to another (the credit provider). For the purposes of the National Credit Code, the amount of credit is the amount of the debt actually deferred and does not include:  any interest charge under the contract or  any fee or charge that is to be or may be debited after credit is first provided. The National Credit Code does not apply to the provision of credit if, under the contract:  the provision of credit is limited to a total period that does not exceed 62 days  the maximum amount of credit fees and charges that may be imposed or provided for does

not exceed five per cent of the amount of credit and  the maximum amount of interest charges that may be imposed or provided for does not exceed an amount equal to the amount payable if the annual percentage rate were 24 per

cent per annum.

The effect of the Draft Regulations is to bring entities such as payday lenders which would generally be regulated under the Consumer Credit Act, under the regulatory umbrella of new Part 7.9A of the Corporations Act by effectively deeming that short term credit contracts are financial products.

Making an intervention order Proposed section 1023D of the Corporations Act applies if ASIC is satisfied that a financial product is, or is likely to be, available for acquisition by issue, or for regulated sale, to persons as retail clients and has resulted in, or will or is likely to result in, significant detriment to retail clients.

For the purposes of proposed Part 7.9A, a financial product is a facility through which, or through the acquisition of which, a person makes a financial investment, manages financial risk or makes non-cash payments.153 However, the term financial product does not include:

• a financial product issued, or offered for regulated sale, by an exempt body or an exempt public authority or

• a financial product specified for that purpose in regulations.154

Where ASIC is satisfied that a financial product has resulted in, or will or is likely to result in, significant detriment to retail clients, it may order that a person must not engage in certain conduct in relation to the product either entirely, or subject to conditions.155 In this case the order is not a legislative instrument.156

153. Corporations Act, subsection 763A(1). 154. Corporations Act, proposed section 1023B. 155. Corporations Act, proposed subsection 1023D(1). 156. Corporations Act, proposed subsection 1023D(2).

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In addition, where ASIC is satisfied that a class of financial products, has resulted in, or will or is likely to result in, significant detriment to retail clients, it may order that a person must not engage in certain conduct in relation to the class of products either entirely, or subject to conditions.157 In this case the order is a legislative instrument. Item 10 of Part 1 in Schedule 2 to the Bill inserts proposed subparagraph 1317(gdm)(i) into the Corporations Act so that the decision to issue a product intervention order in relation to a class of financial products is not reviewable by the Administrative Appeals Tribunal (AAT).

Significant detriment The following matters must be taken into account when determining the question whether there is, or may be, significant detriment:

• the nature and extent of the detriment

• the actual or potential financial loss to retail clients resulting from the product

• the impact that the detriment has had, or will or is likely to have, on retail clients and

• any other matter prescribed by regulations.158

According to the Australian CFD and FX Forum ‘transparency in ASIC’s assessment [of what constitutes significant detriment] is essential in order for the industry to have a common and clear understanding of the circumstances in which ASIC may exercise its product intervention powers’.159 In its view ASIC should be required to take into account whether the detriment was caused ‘by AFS licensees or by unlicensed’—generally being offshore brokers.160 In addition given the significant commercial impact that a product intervention could cause, the Australian CFD and FX Forum considers that ‘the scale of detriment should be measured against the threshold of significant harm on a market wide basis and this should be explicitly reflected in the legislation’.161

According to the Explanatory Memorandum to the Bill:

This power can be used as a last resort or pre-emptive measure where there is a risk of significant detriment to a class of consumers. This power also enables intervention without a demonstrated or suspected breach of the law. However, consistent with the FSI, ASIC is held to a high level of accountability for its use, given the potential significant commercial impact of this power.

162

Despite this apparent assurance, the Australian Banking Association has expressed concern that the concept of significant detriment remains undefined:

In our view it should be made clear that significant detriment is not present merely because a large number of consumers have incurred an otherwise insignificant detriment. Further it should be clarified that significant detriment does not extend to immunising customers from any loss or realisation of risk where a product is operating within risk parameters.

163

157. Corporations Act, proposed subsection 1023D(3). 158. Corporations Act, proposed subsection 1023E(1). 159. Australian CFD and FX Forum, Submission to Treasury, op. cit., p. 2. 160. Ibid. See also IG, Submission to Treasury, op. cit., p. 2. 161. Ibid., p. 3. 162. Explanatory Memorandum, Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention

Powers) Bill 2018, p. 66. 163. Australian Banking Association, Submission to Treasury, op. cit., p. 6.

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Requirement for consultation Before it makes a product intervention order, ASIC must consult persons who are reasonably likely to be affected by the proposed order and, for APRA-regulated entities, APRA.164 Regulations may prescribe requirements for consultation. However, at the time of writing this Bills Digest, the draft regulations in respect of the Bill do not contain such requirements. ASIC will comply with the consultation requirement if it makes the proposed order, or a description of the content of the proposed order, available on its website and invites the public to comment on the proposed order.165

Of concern to some submitters is that proposed subsection 1023F(3) of the Corporations Act provides that ‘a failure by ASIC to comply with the consultation requirements does not invalidate a product intervention order’.166 It was suggested that ‘failure by ASIC to follow such a process should void the intervention’ and that ASIC should ‘become liable for damages to the entity if the intervention caused significant disruption to the entity’s business and loss of profit’.167

Duration As stated above, some product intervention orders will be legislative instruments and others will not. Those that are, will commence on the day after they are registered on the Federal Register of Legislation under the Legislation Act 2003, or a later day specified in the order. Those orders which are not legislative instruments commence the day after they are published by ASIC on its website, or a later day specified in the order.168 Generally, a product intervention order remains in force for 18 months, or any shorter period specified by the regulations or in the order itself.169

A product intervention order may be extended only with the approval of the Minister—based on a report by ASIC given before the order ceases to be in force.170 In that case ASIC may, by legislative instrument, declare that a product intervention order remains in force until it is revoked or for a specified period unless it is revoked earlier.171 Item 10 of Part 1 in Schedule 2 to the Bill inserts proposed subparagraph 1317(gdm)(ii) into the Corporations Act so that the decision is not reviewable by the AAT.

ASIC may amend a product intervention order that is in force. However that power is subject to the following limitations:

• where the Minister has approved an extension of a product intervention order, ASIC cannot amend the order without the prior approval of the Minister

• an amendment to a product intervention order must not have the effect of extending the period it remains in force for longer than the maximum period.172

Item 10 of Part 1 in Schedule 2 to the Bill inserts proposed subparagraph 1317(gdm)(iii) into the Corporations Act so that a decision to amend a product intervention order is not reviewable by the AAT if the order (and therefore the amendment) have been made by legislative instrument. A

164. Corporations Act, proposed section 1023F. 165. Corporations Act, proposed subsection 1023F(2). 166. Finance Industry Delegation, Submission to the Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, [Submission no. 15], n.d., p. 5.

167. Australian CFD and FX Forum, Submission to Treasury, op. cit., p. 5. 168. Corporations Act, proposed paragraph 1023G(1)(b) and proposed subsection 1023L(3). 169. Corporations Act, proposed subsection 1023G(2). 170. Corporations Act, proposed subsections 1023H(3) and (4). 171. Corporations Act, proposed subsection 1023H(1). There appears to be a drafting error in proposed subsection 1023H(1),

which refers to subsection 1023H(5). No subsection 1023H(5) exists. 172. Corporations Act, proposed section 1023J.

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decision to amend a product intervention order that is not a legislative instrument may be reviewed by the AAT.

ASIC may revoke a product intervention order. Where the Minister has made an order extending an order, ASIC must not revoke the order without the approval of the Minister. In addition, the revocation of a product intervention order that is a legislative instrument must be by legislative instrument.173 Item 10 of Part 1 in Schedule 2 to the Bill inserts proposed subparagraph 1317(gdm)(iv) into the Corporations Act so that a decision to revoke a product intervention order is not reviewable by the AAT if the order (and therefore the revocation) have been made by legislative instrument. A decision to revoke a product intervention order that is not a legislative instrument may be reviewed by the AAT.

Essentially then, a product intervention order, an amendment to a product intervention order or the revocation of a product intervention order is not reviewable by the AAT if that action is taken by way of legislative instrument.

ASIC may remake product intervention order which has ceased to be in force or has been revoked. However this power is limited. ASIC may only take such action if it considers that circumstances have materially changed since the order was made or if the Minister approves.174

Item 9 in Part 1 of Schedule 2 to the Bill inserts proposed subsection 1101J(2) into the Corporations Act to prevent the Minister from delegating his or her powers to approve the extension, amendment, revocation or remaking of a product intervention order.

Notification requirements The terms of a product intervention order may include:

• a requirement that a specified person who has dealt in a financial product in relation to a retail client or provided financial product advice to a retail client in relation to a financial product to take reasonable steps to notify the retail client of the terms of the order and any other matters specified in regulations and

• specify requirements for giving those notifications—for instance, the timing of the notification.175

Stakeholder comments Some submitters were very concerned that consultation would be public.

According to the Australian CFD and FX Forum ‘consultation must be a private matter with no pre-exercise of the product intervention power and must give the affected entity reasonable opportunities to respond and to resolve problems identified by ASIC’.176

The Financial Services Council also submitted that there ‘should be private consultation and a reasonable minimum period of consultation in relation to use of product intervention power’. This is, in its view, ‘essential to provide due process and procedural fairness and for the consultation to be meaningful and effective’.177

173. Corporations Act, proposed section 1023K. 174. Corporations Act, proposed section 1023M. 175. Corporations Act, proposed section 1023N. 176. Australian CFD and FX Forum, Submission to Treasury, op. cit., p. 5. 177. Financial Services Council, Submission to Treasury, op. cit., p. 3.

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Enforcement of product intervention orders Proposed subsection 1023P of the Corporations Act creates offences for:

• engaging in conduct contrary to a product intervention order that is in force in relation to the person178

• a failure to comply with a requirement in a product intervention order to take reasonable steps to notify a retail client179 and

• a failure to take all reasonable steps as soon as practicable to ensure that other persons who engage in conduct to which the order applies are aware of the order.180

However, it is a defence to the first two of the three offences above if the product intervention order is not a legislative instrument and the person was not aware, and could not reasonably have been aware, of the order.181 The offences are also civil penalty provisions.182

Civil liability Under proposed subsection 1023Q of the Corporations Act, a person who suffers loss or damage because of a contravention of an intervention order will be able to recover that loss or damage by civil action.

Amending the Consumer Credit Act Part 1 of Schedule 2 to the Bill also amends the Consumer Credit Act by inserting proposed Part 6-7A—Product intervention orders.183 The new Part sets out the framework for the making and enforcement of those orders.

About the Consumer Credit Act The Consumer Credit Act, which contains the National Credit Code applies to credit contracts entered into on, or after, 1 July 2010184 where:  the lender is in the business of providing credit  a charge is made for providing the credit  the debtor is a natural person or strata corporation and  the credit is provided for:

- personal, domestic or household purposes, - to purchase, renovate or improve residential property for investment purposes or - to refinance credit previously provided for this purpose.185

178. Corporations Act, proposed subsection 1023P(1). Item 12 of Part 1 in Schedule 2 to the Bill amends Schedule 3 of the Corporations Act so that the maximum penalty is 200 penalty units or imprisonment for five years, or both. Proposed subsection 1023P(1) is also a civil penalty provision as reflected in amendments made by item 11 in Part 1 of Schedule 2 to the Bill to the table in subsection 1317E(1) of the Corporations Act.

179. Corporations Act, proposed subsection 1023P(2). Item 12 of Part 1 in Schedule 2 to the Bill amends Schedule 3 of the Corporations Act so that the maximum penalty is 200 penalty units or imprisonment for five years, or both. Proposed subsection 1023P(1) is also a civil penalty provision as reflected in amendments made by item 11 in Part 1 of Schedule 2 to the Bill to the table in subsection 1317E(1) of the Corporations Act.

180. Corporations Act, proposed subsection 1023P(4). Item 12 of Part 1 in Schedule 2 to the Bill amends Schedule 3 of the Corporations Act so that the maximum penalty is 200 penalty units or imprisonment for five years, or both. Proposed subsection 1023P(1) is also a civil penalty provision as reflected in amendments made by item 11 in Part 1 of Schedule 2 to the Bill to the table in subsection 1317E(1) of the Corporations Act

181. Corporations Act, proposed subsection 1023P(3). 182. Corporations Act, proposed table items 40P, 40Q, and 40R, subsection 1317E(1) (item 11, Schedule 2 of the Bill). 183. Item 13 of Part 1 in Schedule 2 to the Bill. 184. ASIC, ‘National Credit Code’, ASIC website. 185. Consumer Credit Act, Schedule 1, clause 5.

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Chapter 3 of the Consumer Credit Act contains the responsible lending obligations.

Proposed subsection 301D(1) of the Consumer Credit Act empowers ASIC to made an order that a person must not engage in specified conduct in relation to a credit product—being a credit contract, mortgage, guarantee or consumer lease—either entirely or except in accordance with conditions specified in the order if ASIC is satisfied that the credit product (or proposed credit product) has resulted in, or will or is likely to result in, significant detriment to consumers.

Significant detriment For the purposes of proposed Part 6-7A of the Consumer Credit Act whether a credit product has or will result in significant detriment to consumers is to be assessed having regard to:

• the nature and extent of the detriment

• the actual or potential financial loss to consumers resulting from the product

• the impact that the detriment has had, or will or is likely to have, on consumers and

• any other matter prescribed by regulations.186

Key issue—consumer leases A consumer lease is a contract for the hire of goods for a fixed term of greater than four months, where the consumer has no contractual right or obligation to purchase the goods at the end of the lease term. If there is a right or obligation to purchase the goods at the end of the lease term (for example a sale of goods by instalments arrangement), the contract is considered a credit contract.187

Under a consumer lease, consumers make rental payments to the lessor, usually on a fortnightly basis, over a fixed term (typically of between 12 and 48 months). Although under a consumer lease a consumer does not have a contractual right or obligation to purchase the goods at the end of the lease, in practice most lessors allow the consumer to either retain the goods (or similar goods) at the end of the contract or gift the goods to a third party, nominated by the consumer.188

In September 2015, ASIC published its report into the Cost of consumer leases for household goods.

In relation to Centrelink recipients, ASIC made the following findings:

• they were consistently charged rental payments of $50 a fortnight or more. This is consistent with the 2013 findings of the review of Centrepay, which found that the average amount consumers were paying for leases paid for through Centrepay was about $76 a fortnight

• the total cost of leases for Centrelink recipients was significantly higher than the highest cost of leases identified in an RMIT market survey (which was the price at the 75th

percentile) and

• they were not offered low-cost leases (even though they were available more broadly in the market): the lowest fortnightly rental payment charged to Centrelink recipients was $53 for a lease with a one-year term, and $40 for a lease with a two-year term.189

The table below provides examples of high-cost leases (one-year term) for Centrelink recipients.

186. Consumer Credit Act, proposed subsection 301E(1). 187. ASIC, Cost of consumer leases for household goods, Report 447, September 2015, p. 4. 188. Ibid. 189. Ibid., p. 23.

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Table 1: Lease costs for Centrelink recipients

Product Retail price Fortnightly

rental payment

Total cost Interest rate

7 kg washing machine $700.00 $83.69 $2,175.94 292.18%

5 kg dryer $345.00 $117.00 $3,042.00 884.34%

253 L fridge $498.00 $65.00 $1,690.00 324.35%

145 L chest freezer $319.00 $42.00 $1,092.00 327.65%

ASIC, Cost of consumer leases for household goods, Report 447, September 2015, p. 22

In January 2018, ASIC announced a package of regulatory outcomes against Thorn's (Thorn Australia Pty Ltd's) consumer leasing businesses Radio Rentals, RR and Rentlo Reinvented. The outcomes included $6.1 million in refunds to customers and write-offs of default fees, and an additional $13.8 million in customer refunds of excess lease payments.190 The amendments to the Consumer Credit Act will give ASIC an additional power to issue a product intervention order where it determines that, amongst other things, a consumer lease has, or will, result in significant detriment to consumers.

Proposed subsections 301F-301N of the Consumer Credit Act are in near equivalent terms as proposed subsections 1023F—1023N of the Corporations Act as set out above—with references to financial products in the Corporations Act substituted for references to credit products in the Consumer Credit Act.

Enforcement There are some differences in the enforcement provisions to take into account the current drafting, including penalties, of the Consumer Credit Act.

Proposed section 301P creates offences and civil penalties separately. The following conduct gives rise to criminal offences:

• where a person engages in conduct contrary to a product intervention order191

• where a person required by a product intervention order to take reasonable steps to notify a consumer fails to comply with the requirement192 and

• if a product intervention order has been served on a person, the person does not take all reasonable steps as soon as practicable to ensure that other persons who engage in conduct to which the order applies are aware of the order.193

In each of the circumstances listed above, the maximum penalty is 200 penalty units, or imprisonment for five years, or both.

The following are civil penalty provisions:

190. B Butler, ‘Thorn in $22m rental payout’, Herald Sun, 24 January 2018, p. 49. 191. Consumer Credit Act, proposed subsection 301P(2). The offence provision does not apply if the product intervention order is not a legislative instrument and the person was not aware, and could not reasonably have been aware, of the order: proposed subsection 301P(5).

192. Consumer Credit Act, proposed subsection 301P(4). The offence provision does not apply if the product intervention order is not a legislative instrument and the person was not aware, and could not reasonably have been aware, of the order: proposed subsection 301P(5).

193. Consumer Credit Act, proposed subsection 301P(7).

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• where a person engages in conduct contrary to a product intervention order that is in force in relation to the person194

• where a person required by a product intervention order to take reasonable steps to notify a consumer fails to comply with the requirement195 and

• if a product intervention order has been served on a person, the person fails to take all reasonable steps to ensure that other persons who engage in conduct to which the order applies are aware of the order.196

In each of the cases above the maximum civil penalty is 200 penalty units.

In addition, consistent with the amendments to the Corporations Act which are detailed above:

• item 14 of Part 1 of Schedule 2 to the Bill inserts proposed subparagraphs 327(1)(d)(iii)-(v) into the Consumer Credit Act to ensure that certain decisions about product intervention orders are not reviewable by the AAT and

• item 15 of Part 1 of Schedule 2 to the Bill inserts proposed subsection 337(1A) into the Consumer Credit Act to prevent the Minister from delegating his or her powers to approve the extension, amendment, revocation or remaking of a product intervention order.

Importantly there is no equivalent to proposed section 1023Q of the Corporations Act, which permits a person who suffers loss or damage because of a contravention of a product intervention order to recover that loss or damage by civil action. This is because Part 4-2 of the Consumer Credit Act contains arrangements for compensating consumers for loss or damage.

Concluding comments

Design and distribution obligations The drafting of the new design and distribution obligations in the Bill is, in some places, lacking in clarity and is not quite consistent with the drafting style in the existing provisions of the Corporations Act. It is fortunate that the Explanatory Memorandum provides a thorough account of the provisions in the Bill.

This may well be because the Bill represents the first time such obligations have been introduced in Australia. The tone of many submissions reflects a sense that stakeholders do not know, in practical terms, what a target market determination will look like, or what they will have to do on a day to day basis to ensure that a target market determination that they have made remains appropriate. Considerable work will need to be done by ASIC to ensure that adequate guidance materials are available before the Bill, when enacted, is due to commence.

The sense of uncertainty is not helped by the instrument making powers in proposed section 994L of the Corporations Act. It is possible for ASIC to exempt persons who are currently captured by the Bill or include a class of persons who are not. Whilst the powers are positive in that they give ASIC flexibility to make changes to the regulatory capture of the design and distribution obligations where needed, they have the capacity to add confusion to a complex and expensive regime.

194. Consumer Credit Act, proposed subsection 301P(1). The civil penalty does not apply if the product intervention order is not a legislative instrument and the person was not aware, and could not reasonably have been aware, of the order: proposed subsection 301P(5).

195. Consumer Credit Act, proposed subsection 301P(3). The civil penalty does not apply if the product intervention order is not a legislative instrument and the person was not aware, and could not reasonably have been aware, of the order: proposed subsection 301P(5).

196. Consumer Credit Act, proposed subsection 301P(6).

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Product intervention power The greatest concern for submitters in relation to the product intervention power is the nature of the consultation in which ASIC should engage before a product intervention order is made. Submitters want that consultation to be private—so that they do not suffer reputational damage in the event that no order is made. The drafting of proposed section 1023F of the Corporations Act requires that ASIC not make a product intervention order unless it has consulted with ‘persons who are reasonably likely to be affected by a proposed order’ but does not impose any time limit on that process.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018 36

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