ASIC’s Product Intervention Powers were introduced to allow ASIC to intervene where products have resulted in (or are likely to result in) significant detriment to retail clients in relation to various financial products, including: securities, insurance products, derivatives, superannuation and credit products.
What are the Product Intervention Powers?
The product intervention powers enable ASIC to make orders to intervene and take action where it considers financial products:
- have caused;
- will result in;
- are likely to result in;
significant detriment to retail clients.
The product intervention powers give ASIC scope to intervene in the distribution of products and enable ASIC to take action before harm, or further harm, is caused to retail clients. Prior to having these powers, ASIC could only intervene if there was a suspected contravention of the law.
The powers can be applied to:
- financial products regulated by the Corporations Act,
- credit products regulated by the NCCP Act, and
- financial products as defined by the Australian Securities and Investments Commission Act (2001) (ASIC Act).
What is consumer detriment?
Detriment was intended by lawmakers to include a range of harm or damage that may flow from a product. ASIC indicates in Regulatory Guide 272: product Intervention Power (RG272) that this could include financial and non-financial harm and include instances where the product does not align with the consumer’s needs, understanding or expectations.
What is the process of introducing a Product Intervention Order?
There are two types of product intervention orders:
- an individual product intervention order which applies to a specified person/s in relation to a product. Individual orders are not legislative instruments; or
- a market-wide product intervention order which applies to a person, in relation to a class of products.
ASIC can make an order that a person not engage in specified conduct in relation to a product entirely, or except where certain conditions are met.
To utilise its power, ASIC must be satisfied that a financial or credit product has, or is likely to result in significant detriment or harm. To do this, ASIC will take into account the nature and extent of the potential detriment, the actual or potential loss to the client and the impact on the client.
It is important to note that a client may suffer detriment despite product disclosure obligations being complied with. Before ASIC can issue an order, it must satisfy consultation and notification obligations, including consulting with people likely to be affected by the order and/or making the order available on the ASIC website for public comment.
How long do Product Intervention Orders last?
ASIC has the power to make a product intervention order for up to 18 months. This can be extended or made permanent with the approval of the Minister. Extensions can be made multiple times, each with the approval of the Minister. Before seeking approval, ASIC is required to prepare a report to the Minister as to whether the extension is should be made.
Consequences of breaching a Product Intervention Order
Serious consequences and penalties can be imposed for entities or individuals who breach product intervention orders. Consumers are able to recover loss or damage suffered because of a breach of a product intervention order via civil action. Courts have the power to award damages, make an order declaring the contract entered into by the consumer is void, or make any other orders it sees fit.
ASIC may also take action against entities and individuals through criminal prosecution.
Examples of Product Intervention Orders so far
Short Term Credit
In July 2022, the product intervention orders in relation to short term credit came into force. The orders, made by legislative instrument, prohibit providers of short term credit from charging unreasonably high fees, in excess of the caps outlined in the National Credit Code. The orders target credit providers and their associates who offer short term credit of amounts up to $1000 and who charged fees under separate contracts. These credit providers structured their arrangements to take advantage of the short term credit exemption in the National Credit Code at Schedule 1 of the NCCP Act by requiring the money to be repaid within a term of 62 days, meaning these credit contracts are not regulated by the National Credit Code or subject to the Australian Credit Licensing regime.
Associates of short-term credit providers offer collateral services under a separate agreement with the consumer to fast track the credit application. The fees for these collateral services are often very high relative to the amount borrowed by the consumer. ASIC found that the total fees and repayments can amount to up to 990% of the loan amount. ASIC considered this type of short-term lending model can (and does) cause significant consumer detriment, including:
- the target market for these types of loans are consumers in urgent need of small amounts of credit and experiencing financial stress;
- the total cost payable under the contract is significantly higher than the maximum charges permitted by the NCCP Act;
- there is no adequate assessment of the consumer’s capacity to repay the loan and ASIC has found credit is often provided under this model to consumers who are likely to default;
- default fees result in high fees being charged, beyond the default fees permitted by the NCCP Act;
- high levels of repeat use by vulnerable consumers can lead to consumers ending up in a high cost debt spiral.
ASIC made a product intervention order in respect of binary options (“Binary Options Order”) to prohibit the issue and distribution of over-the-counter binary options to retail clients. The Binary Options Order became effective on 3 May 2021. The Binary Options Order is only applicable to retail clients and not applicable to wholesale clients.
Contracts For Difference
ASIC has also used its product intervention powers in relation to Contracts for Difference (CFDs). In March 2021, ASIC issued an order:
- imposing leverage limits available to retail clients,
- standardising margin close-out arrangements,
- protecting against negative account balances by limiting losses to the amount in a client’s trading account, and
- prohibiting certain inducements.
ASIC Commissioner Cathie Armour said
“We will closely monitor compliance with the product intervention order and won’t hesitate to take appropriate action to enforce the order.’ ‘We are also paying careful attention to changes in CFD providers’ reported holdings of retail client money and any mis-classification of retail clients as wholesale clients, which would risk denying them important rights and protections. Protecting retail investors from harm, particularly at a time of heightened vulnerability, is a priority for ASIC.”
In April 2022, the product intervention order was extended for a further five years until 23 May 2027. ASIC’s report 724, summarises ASIC’s analysis of the impact of the order and notes:
- a 91% reduction in aggregate net losses by retail client accounts
- 51% fewer loss-making retail client accounts per quarter on average
- an 87% decrease in margin close-outs affecting retail client accounts per quarter on average
- an 88% reduction in negative balance occurrences for retail clients per quarter on average
- ASIC can make a Product Intervention Order if a financial or credit product has, or is likely to, result in significant detriment to retail clients.
- ASIC’s power only applies to products acquired by consumers on or after 6 April 2019.
- A Product Intervention Order may include requirements that a person is not to engage in specified conduct, either entirely or in accordance with conditions. This may include banning a person from issuing the product or directing that a product be issued with a specific warning or limitation.
- A Product Intervention Order may contain a requirement that the product not be issued to a retail client unless certain conditions have been met.
- ASIC can make an order that may last for up to 18 months. It can also, with approval from the Minister, declare that the order be extended to remain in force for either an extended period or permanently.
- ASIC can use the power to address industry-wide problems.
- Failure to comply with an order may result in civil liability as well as criminal penalties. A person who suffers loss or damage as a result can recover their loss through civil action.
The product intervention powers commenced on 6 April 2019 with amendments to the Corporations Act 2001 (Corporations Act) and the National Consumer Credit Protection Act 2009 (NCCP Act).
- Consultation Paper 316
- 19-250MR ASIC makes product intervention order banning short term lending model to protect consumers from predatory lending
- ASIC Corporations (Product Intervention Order—Short Term Credit) Instrument 2019/917
- 22-243MR ASIC’s binary options ban extended until 2031
- ASIC Corporations (Product Intervention Order—Binary Options) Instrument 2021/240
- 22-082MR ASIC’s CFD product intervention order extended for five years
- 21-060MR ASIC’s CFD product intervention order takes effect
- ASIC Corporations (Product Intervention Order—Contracts for Difference) Instrument 2020/986
- 19-079MR ASIC Welcomes Approval of New Laws to Protect Financial Service Consumers
- Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019.