ASIC powers to protect borrowers from ‘poverty trap’

Speaking at the Australian Securities and Investments Commission’s (ASIC) annual forum, the chief executive of the Financial Rights Legal Centre, Karen Cox, welcomed the regulators’ new powers enshrined under the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019.

Under the bill, product providers will be obligated to specify the target market for each of their products, ensuring that the design of the products are consistent with the likely objectives, financial situation and needs of customers within that target market.The obligations will be phased in over two years, requiring product issuers to identify in advance the consumers for whom the products are appropriate, and distribute to that target market.

“I’m thrilled that ASIC has finally got these powers because I’ve been working in this sector for a very long time and we have spent years at our work trying to mould existing laws to fit the problem when there is no law against the problem,” Ms Cox said.

Ms Cox said that previous arrangements made it difficult to prosecute financial institutions for selling products that produced poor consumer outcomes.

“For example, if you’re trying to argue that someone has engaged in misleading and deceptive conduct, then your argument is that a product is so bad that they must have been misled in order to have bought it because if they understood it, they wouldn’t have bought it,” she added.

“It’s very frustrating because if they’ve been told irrelevant facts but just not understood the import of those.”

The chief executive made specific reference to the provision of finance from payday lenders that avert credit laws, some of which she accused of causing “enormous harm” to borrowers.  

“We have a regulatory framework in Australia specifically for payday lending or small amount contracts for people who are desperate for a bit of money,” she continued.

“There is a particular provider out there who has effectively avoided the credit law. I think any financial counsellor or credit lawyer in this country would know the name of who I’m talking about because they’re so predominant and so many of the people we speak to have loans from them. 

“These are loans where you can borrow $150 and within a short few months owe $1,500 through a whole range of fees that would actually be illegal if it was covered by the credit law.”

Ms Cox added: “Time and again over the years, we have seen this process, where a company springs up, develops a way of getting around existing laws and then we have to wait several years while we convince not only the regulator but the Parliament that this is a problem and they introduce a new law in order to address the problem.”

Ms Cox expects ASIC’s new powers to better protect consumers from the provision of misleading or deceptive financial products by enabling the regulator to intervene before they are released to market.

“What we’re really hoping is that the product intervention powers – because they’ve been fairly forwardly scoped now – can be used to [address] the problem without us having go through a long process where an industry gets totally entrenched before anything is done about it,” Ms Cox said.

“Certainly, a high priority for us would be addressing those people out there who are currently avoiding the existing credit law to rip off people who are extremely disempowered, people who are between a rock and a hard place who just need money for very small daily expenses. 

“[The impact on] someone who is on a relatively low fixed income is enormous if you’ve got a loan that can quadruple in a very short time. It’s just a poverty trap.”

[Related: ASIC encouraging financial firms to adopt regtech]