Hayne questions why bill doesn’t cover all credit products

In the final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which was handed to the Governor-General on Friday (1 February) and publicly released on Monday (4 February), Commissioner Kenneth Hayne addressed concerns around consumers not being recommended the most suitable financial products for their circumstances.

He acknowledged the measures that are underway to encourage the provision of the most fitting products to consumers, such as the design and distribution obligations proposed in the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018.

Specifically, the design and distribution obligations will require product issuers “to develop a ‘target market determination’ that will specify the target market for each of their products.”

“This target market must be such that the product will likely be consistent with the likely objectives, financial situation and needs of customers within that target market,” the final royal commission report states.

Commissioner Hayne further explained that, should the bill pass parliament, product issuers would be prohibited from offering products that are not consistent with the objectives, financial circumstances and needs of customers within the specified target market, or offering products that are only suitable for a “narrow” and therefore “commercially unviable” market.

The proposed legislation would additionally require issuers who distribute their own products, as well as third-party distributors such as brokers and financial advisers, to “take reasonable steps, such that the way they market, advise on or sell products is consistent with the target market determination for that product”.

“The reforms recognise that current disclosure requirements are not, on their own, sufficient to inform consumers fully,” the commissioner noted in his final report.

Under the proposed bill, the Australian Securities and Investments Commission (ASIC) would also be granted a new product intervention power that would allow it to order that a person “must not engage in specified conduct in relation to a product where [the corporate regulator] perceives a risk of significant consumer detriment”.

“ASIC would also be able to ban aspects of remuneration practices where there is a direct link between remuneration and distribution of the product,” the final report states.

However, Commissioner Hayne said ASIC’s product intervention powers do not extend to financial products that are not regulated by the Corporations Act, but are only regulated by Division 2 of Part 2 of the ASIC Act.

This part of the ASIC Act defines a financial product as “a facility through which, or through the acquisition of which, a person does one or more of the following: (a) makes a financial investment; (b) manages financial risk; (c) makes non-cash payments.”

Mortgages, therefore, do not fall within the definition of financial product, and further, are not regulated by the Corporations Act, meaning that the ASIC’s proposed product intervention powers do not apply to mortgages.

Commissioner Hayne pointed out that there are “some restrictions on the breadth of the proposed powers.

“It is not apparent why the powers should not extend, as ASIC has requested, to all financial products and credit products within ASIC’s regulatory responsibility,” he wrote.

Other “restrictions” in the bill, according to the commissioner, include the provisions that:

• ASIC must be satisfied that a financial product “has resulted in, or will or is likely to result in, significant detriment to retail clients”;
• the product intervention order is, generally speaking, limited to a period of 18 months, although that period can be extended; and
• ASIC is required to consult prior to making a product intervention order.

As such, Commissioner Hayne argued that while ASIC’s product intervention powers “go some way to altering the kinds and characteristics of products that may be sold”, such as accidental death insurance, it may not solve all of the problems and issues that can arise in connection with the sale of low-value products.”

Find out more about what the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry means for the broking industry, and what the next steps are, by attending the Better Business Summit 2019.

Running across five different states every Thursday from 14 February, the Better Business Summit provides brokers with straight-talking, practical advice to help them grow and improve their businesses in this time of change.

Tickets are selling out – so make sure you secure your ticket today to stay ahead of the curve and prepare your business.

[Related: Hayne proposes industry codes become law]