Product intervention: does ASIC need more power?

It has been recommended that ASIC should be given a new product intervention power. This needs to be considered in light of ASIC’s existing regulatory toolkit.

The introduction of a proactive product intervention power for the Australian Securities  and Investment Commission (ASIC) poses the risk of stifling product intervention and causing uncertainty. Some aspects of the proposed powers, particularly as they relate to marketing and disclosure materials, seem unnecessary given ASIC’s existing regulatory toolkit.

The product intervention power

The final report of the FSI argues that ASIC should be equipped to take a more proactive approach to reducing the risk of significant consumer detriment with a new product intervention power, echoing calls in a Senate Committee’s report on ASIC’s performance for ASIC to have the power to prohibit the issue of certain products in retail markets.

The Report states that the power should be used as a last resort or pre-emptive measure where there is risk of significant detriment to a class of consumers. ASIC would be able to use the power without a demonstrated or suspected breach of the law. The report also states that ASIC should be subject to a high level of accountability for its use of the power.

The power would be limited to temporary intervention for 12 months (subject to Government extension where more time is needed for change in industry practices or for Government implementation of permanent reform) and would be subject to a judicial review mechanism. ASIC would also be required to consult with the Australian Prudential Regulation Authority (APRA) prior to using the power in relation to APRA-regulated bodies.

The power would allow ASIC to impose or require amendments to marketing and disclosure materials, warnings to consumers or terminology changes, distribution restrictions and product banning.

ASIC’s regulatory toolkit

One of the concerns raised about ASIC’s current regulatory toolkit is that ASIC can only take action to rectify consumer detriment after a breach or suspected breach of the law and that ASIC can only take enforcement action on a case-by-case basis. 

The Report points to peer jurisdictions such as the United Kingdom, where the Financial Conduct Authority has product intervention rules which have been used to impose restrictions on the distribution of contingent convertible instruments to retail investors. It is relevant to consider ASIC’s current regulatory toolkit in determining whether there is a need for adopting such rules in Australia.

The Report points to systemic issues such as the freezing of mortgage schemes during the global financial crisis and the collapse of unlisted debenture products. It notes that ASIC provided disclosure guidance on both of these product types but without the power to impose such disclosure requirements. This perhaps minimises the practical impact of ASIC’s extensive output of regulatory guidance since the global financial crisis. ASIC’s power to issue stop orders in relation to disclosure documents should also be noted.

The “if not, why not” disclosure benchmarks in ASIC’s regulatory guidance may go beyond strict disclosure requirements under the Corporations Act. However, the reality is that ASIC’s extensive regulatory guidance on a wide variety of products has led to significant changes to upfront and ongoing disclosure practices and has likely influenced business models and product design for these products, particularly through the use of disclosure benchmarks. As this guidance applies to whole classes of issuers, this represents a significant regulatory mechanism used by ASIC.

ASIC has been particularly active since the global financial crisis in playing an interventionist role in product disclosure, with specific disclosure guidance for debentures and notes, over-the-counter contracts for difference (CFDs), unlisted mortgage schemes, unlisted property schemes, infrastructure entities, agribusiness schemes and hedge funds, in additional to its advertising guidance.

ASIC notes in its guidance that it will consider using its stop order powers if there is material non-disclosure or misleading disclosure of matters covered by its guidance, which is obviously a significant incentive for issuers to follow the guidance.

In many instances, ASIC has sought to impose “if not, why not” disclosure benchmarks, requiring issuers to explain whether they meet certain benchmarks, and if not, to explain why not. One example is the disclosure benchmark for CFDs which relates to whether an issuer maintains a client qualification policy, including minimum qualification criteria and the processes in place to ensure prospective investors not meeting the criteria do not open an account. Although meeting such benchmarks is not required, inevitably issuers whose products are affected by such benchmarks are likely to adapt business practices.

ASIC also has a range of significant enforcement powers under the Corporations Act, including in its role as regulator of financial services licensing. In addition, ASIC has the power, following a hearing, to issue a stop order where a product disclosure statement (PDS) is defective or is not clear, concise and effective. ASIC may also issue an interim stop order without consulting the issuer where it considers a delay would be prejudicial to the public interest. The issue of stop orders can have significant consequences for an issuer and as such ASIC may be able to have significant influence on disclosures made by an issuer facing a stop order.

It seems that ASIC may already have a sufficiently flexible and broad ranging regulatory toolkit without additional interventionist powers.

The proposal

The proposal as it relates to imposing or requiring amendments to marketing and disclosure materials, warnings to consumers or terminology changes does not seem to be necessary, given ASIC’s existing powers in relation to disclosure documents and consumer protection. The proposal also raises a question about who should be liable for any statements in those materials which are required or imposed by ASIC. Since the release of its guidance on advertising, ASIC has been particularly active in its scrutiny of marketing materials for financial products and has taken action against various entities for potentially misleading advertising. ASIC’s regulatory toolkit in this area would therefore seem to be sufficient.

The main benefit in introducing a product intervention power seems to be to facilitate targeted early intervention by the regulator, rather than waiting for legislative intervention. Although this may be beneficial in some instances, a key concern about the introduction of such a power is its potential to stifle innovation and create uncertainty. Accountability and clear guidelines on use of the power may go some way to counter these concerns.

The report notes that ASIC would be expected to engage with affected issuers and to consult the Council of Financial Regulators before any use of the power. However, a more formalised consultation process with affected issuers and other relevant stakeholders may be beneficial to provide a real opportunity for all relevant issues to be considered prior to use of the power, given the potential consequences of even a temporary ban, or distribution restrictions, on any financial products. In our experience, industry consultation is key to ensuring that ASIC has available to it all relevant information in relation to financial products.

Nikki Bentley

I understand the financial services industry and thrive on helping our clients in this industry succeed.

Nikki Bentley Partner

Nikki is the Group Leader of Henry Davis York's Corporate Group, which includes the legal teams for Corporate / Mergers & Acquisitions; Investments & Financial Services and Tax.

Nikki is a leading investment funds advisor specialising in financial services and corporate law.  She specialises in business establishment and structuring, fund establishment, funds merger and acquisition, product disclosure and distribution. Nikki leads HDY's corporate group which combines expertise from the Financial Services, M&A and Tax areas.

Nikki provides advice to leading Australian and global fund managers on a full range of corporate, commercial and regulatory issues facing their businesses. She has considerable experience in assisting clients with fund establishment (onshore and offshore), disclosure and distribution. Nikki regularly advises clients on establishing, buying, selling and restructuring their businesses. She also regularly assists clients responding to regulatory enquiries and investigations.

With more than 15 years funds management experience in private practice, government and as an in-house lawyer, Nikki's practice spans the range of funds management products, with particular expertise in hedge funds, property funds and equities.

Nikki is regularly involved in industry and government discussions on regulatory reforms impacting the Australian funds management industry. Nikki is a passionate advocate for the development of a new corporate collective investment vehicle because of the opportunities it could provide to grow the funds management industry. She is the Honorary Legal Counsel and Chair of the Regulatory Committee for the Australian branch of the Alternative Investment Management Association (AIMA) and is a regular participant on the Financial Services Council (FSC) working groups.

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Matthew Farnsworth

It's rewarding to partner with clients to find solutions that add value and help them succeed.

Matthew Farnsworth Special Counsel

Matthew has extensive experience in funds management and financial services law. He advises leading Australian and international financial services clients across a wide range of transactional and regulatory matters.

Matthew advises leading Australian and international financial services clients on transactional and regulatory matters.

Clients look to Matthew to assist them to establish, offer and operate retail and wholesale investment funds. He advises on Australian financial services licensing, fund governance, offer documents and fund restructures, including managed investment schemes and other collective investment vehicles (CIVs).

He also advises on outsourcing arrangements, compliance issues and on ongoing regulatory developments in the financial services sector.

Matthew is experienced in the full range of asset classes and has particular experience in the property funds sector, including fund establishment, capital raising and restructures.

He is also experienced in a wide range of transactions in the financial services sector, joint ventures and funds M&A.

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