• New ASIC powers to prevent “significant customer detriment” in financial services products

On 17 June 2020, ASIC released RG 272: Product Intervention Power which sets out the administration of one of the regulatory tools available to ASIC to prevent significant customer detriment in the financial services sector.

It forms part of ASIC’s enhanced consumer protection toolkit. RG 272 is noteworthy because it enables ASIC to intervene in ways it has previously been unable to, and in doing so provides a further indication of a more determined, proactive ASIC post the Financial Services Royal Commission. RG 272 is broad and flexible but importantly ASIC must consult before it uses its powers and the powers are temporary, applying for a maximum of 18 months.

Some of the ways in which ASIC may use their powers:

  • Order a product or class of products only be offered to specific classes of consumers and for specific circumstances
  • Order amendments, restrictions or banning of marketing and disclosure material for products, as well as the end of specific remuneration arrangements linked to product distribution
  • Products and their features may be banned in their entirety if they do not meet specific criteria

There are two standout features of the temporary intervention power set out in RG 272. ASIC may act:

  • Based upon an emerging risk rather than an actual or suspected breach
  • On a market-wide rather than firm by firm basis

The focus of the product intervention powers is preventing customer detriment before it occurs. RG 272 does not define customer detriment but sets out some of the factors that may cause customer detriment – product features, defective disclosure, poor design and inappropriate distribution. A particular point to note in the RG is the use of the term “choice architecture”, which is described as the “options, processes and pathways” built around the product. ASIC’s product intervention powers apply across the entire product lifecycle and not just to the product itself.

ASIC is committed to improving the behaviors of the entities that it regulates. It is seeking to ensure that they are not merely compliant but also “fair”. ASIC measures fairness as providing products and services that are “accessible, perform in a way that consumers are led to expect and take into account their interests”. ASIC refers to behaviour in the RG that may be interpreted as either “intentional, reckless or inadvertent.’ As it seeks to be a more proactive regulator, it is significant that the trigger for the RG 272 powers is an emerging risk, rather than a suspected breach. Customer detriment can occur even if a licensee complies with the relevant legislative requirements – for example, although the customer received the required information, the wording did not allow the customer to make the appropriate risk / reward trade-off.

ASIC is seeking to eliminate the use of prescriptive regulation and its proposed approach to regulating products is an example of that. The purpose of the proposed regulatory guide: Product design and distribution obligations is to set parameters designed to prevent customer detriment from occurring. However, where ASIC identifies that there is a risk of customer detriment, it can rely upon RG 272 to intervene early to prevent this. It will be interesting to see whether the existence of RG 272 will provide a sufficient incentive for the market to ask themselves not only “can I” but “should I” in respect of the products it is seeking to bring to market. Is the existence of product intervention powers a sufficient incentive to prevent the existence of unfair practices and products?