Proposed new statutory accountability for ‘issuers’ and ‘distributors’ of financial products

In its recent Proposals Paper issued in December 2016, the Commonwealth Government is seeking consultation on proposals to implement a number of financial product recommendations arising from the Financial Services Inquiry (FSI), which involve the potential introduction of new consumer protection measures that will regulate the design and distribution of financial products and which is supported by a new financial product intervention power for ASIC.

The proposals, if implemented, will affect financial product issuers, distributors and advisers.

Type of financial products captured

The proposed design and distribution obligations will apply to all financial products that are made available to retail clients, including insurance products, investment products, margin loans and derivatives.

Product issuers

Under the proposals, issuers of a financial product must identify a target market and design their product to suit the target market’s needs. In particular, issuers must:

  • clearly identify appropriate target and non-target markets for their products
  • select appropriate distribution channels that are likely to result in products being marketed to the target market
  • conduct a regular post-sale review to ensure that compliance of the distribution arrangements with the identified channels and alignment of the product with the target market
  • notify distributors of the identified target and non-target markets for the product.

Distributors

Under the proposals, distributors of a financial product must advertise and distribute a product to the target market in the most appropriate way.

There is no current definition of ‘distributor’ and therefore the proposed obligations have the potential to capture a broad range of intermediaries and operators such as travel agents and credit providers who arrange insurance. However, distributors who provide personal financial product advice will be excluded from the distributor obligations, as they are currently regulated.

In particular, under the proposals distributors must:

  • put in place ‘reasonable controls’ to ensure financial products are distributed in accordance with the issuer’s expectations (channel and target market); and
  • comply with reasonable requests for information from an issuer related to a post-sale product review

Financial product intervention power for ASIC

The proposed reforms to design and distribution will be supported by a new power for ASIC to proactively intervene where ASIC identifies the risk of ‘significant consumer detriment’.

The intervention power will provide ASIC with a number of possible regulatory tools or ‘interventions’ to apply to a range of products on a market-wide (or class) basis or an individual basis. Please refer to our separate news release for details.

The Consultation Paper calls for submissions from the public by 15 March 2017.

For further advice about the proposed design and distribution reforms and their potential impact, or for assistance in preparing any submission to Treasury regarding the proposed reforms, please contact our Corporate Advisory and Financial Services Principal, Michael Bracken.


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