AUSTRALIA – The Australian government passed the Design and Distribution Obligations (DDO) and Product Intervention Powers (PIP) legislation in April to introduce two new consumer protection measures. The DDO and PIP Act adds to the existing Corporations Act 2001 and the National Consumer Credit Protection Act 2009 as a product intervention power of the Australian Securities and Investments Commission (ASIC) to proactively prevent consumer detriment, and design and distribution obligations for financial products.
Product Intervention Powers
- ASIC’s PIP came into effect immediately after royal assent on April 5, 2019
- It allows ASIC to intervene in relation to financial or credit products when it foresees a risk of significant consumer detriment to retail consumers by issuing an Intervention Order, which could include banning the product or restricting its distribution
- The significance of consumer detriment is estimated based on factors such as the nature and extent of the detriment, the actual or potential financial loss due to the product, and the impact the detriment has had or will or is likely to have, on retail clients
- The PIP applies to a greater range of financial products including credit products, which were previously not identified as financial products under the Corporations Act
Design and Distribution Obligations
- The DDO takes effect in 2021, two years after royal assent
- It requires product issuers and distributors to predetermine the appropriate target market for its financial product
- And take steps to ensure that these products are distributed in alignment with the target market determinations
- Financial product offerors are required to make the target market determination (TMD) available publicly and update it within 10 days when subjected to changes
- The DDO ensures that the right products end up in the right hands and shields customers from being sold products that do not meet their needs
Why Should Businesses be Concerned?
The new policy signals the Australian corporate regulator’s interest to tighten controls in the financial services industry and restrict Australian brokers from servicing clients from overseas jurisdictions where the broker is not licensed. By introducing the reforms, ASIC hopes to create a more accountable and fair financial system which its citizens could trust.
Managing Director of DesFran Desmond Foo said: “I believe ASIC is definitely one of the top regulators in the world and all steps taken are aiming to be credible and to set the standards as a leading regulatory body. Companies who are able to thrive in these “rules” will definitely stand out and emerge as more credible, regulated entities than those who are unable to do it.”
How Should Companies Prepare for the New Regime?
In addition to familiarising themselves with the amendments, financial service providers may wish to access current business offerings and distribution channels to ensure compliance with the new measures. With respect to ASIC’s greater intervention power, brokerages should act to achieve greater visibility and accountability in order to respond in a timely and professional manner when the regulator requires additional information or issues an intervention order.
Sharing how he thinks companies will prepare for the new regime, Desmond said: “Many brokers will comply to the standards set up by the regulators… And at the same time, if it is marginalising the brokerage business, then I think there should be a dialogue session between the brokers and the regulators to find a middle ground.” He also suggested that brokerages may wish to step up their efforts to gain more clarity on the regulators’ stance in preparation for the new regime, looking into the consultation documents on PIP and its final regulatory guide planned to be released in September 2019.
The recent tightening of regulatory frameworks by financial regulators, including the Securities & Futures Commission of Hong Kong’s order for brokers to freeze client accounts associated with suspected market manipulation, suggests that companies should stay alert and current to new policies and regulations to remain competitive in the industry.
About the Authors
Desmond Foo is the Managing Director of DesFran. With more than a decade of experience in the finance industry, in particular forex and investment trading, Desmond has proven results of applying his knowledge and skills to provide professional financial services to clients worldwide. Desmond directs the team in DesFran to meet the increasing global demands of offshore and foreign exchange businesses through customised solutions for clients across the world. Desmond holds a master’s degree in Business Administration from the University of Chicago Booth School of Business, and a bachelor’s degree in Business Management with a double major in finance and management from Singapore Management University.
Vicky Wang is Strategic Communications and Research Intern at DesFran. With a strong interest in global finance and economics, she produces articles covering corporate finance and regulations. Vicky is currently pursuing a bachelor’s degree in Business Administration (Strategic & Management Consulting) with a double major in Economics at Emory University in the United States.