The Government is expanding adviser product obligations

Alex Burke,  Senior Writer,  No More Practice Education

Last year, we discussed the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018, which then-Minister for Revenue and Financial Services Kelly O'Dwyer said would enable ASIC to "intervene in the distribution of the product to prevent harm to consumers" in circumstances where it's determined that the product is being "inappropriately targeted or sold."

The law targeted "retail product distribution conduct," which is defined as dealing in the product in relation to a retail client; giving a disclosure document in relation to an offer of the product to a retail client; providing financial product advice in relation to the retail client; and making a "recognised offer, in relation to a recognised jurisdiction, of the product."

Now, as per a statement from Treasurer Josh Frydenberg, the laws will extend further, so as to "improve consumer outcomes requiring issuers and distributors of financial products to ensure products are only sold to customers for whom they are likely to be suitable."

Corporations Amendment (Design and Distribution Obligations) Regulations 2019, open for consultation until October 11, will extend the regime to cover the following products:

  • simple corporate bonds depository interests in simple corporate bonds, where the simple corporate bonds are, or are to be, issued under a 2 part simple corporate bonds prospectus;
  • debentures of a body that is an ADI (authorised deposit-taking institution) or registered under section 21 of the Life Insurance Act 1995;
  • basic banking products;
  • custodial arrangements that are not already subject to the new regime, including an interest in an investor directed portfolio service (IDPS); and
  • products sold in certain situations where the DDO could be avoided.

Frydenberg continued: “These regulations will ensure that the obligations operate as intended, both in relation to the range of products covered and the entities that will be subject to the new regime.

“The regulations reflect the outcomes of consultation on a previous version of the regulations and the extended scope of the obligations as a result of the Royal Commission.”

Note that, as per the original bill, where advisers qualify as “distributors” of financial products, they will need to implement controls to ensure products are distributed in accordance with the relevant target markets and "comply with reasonable requests for information from the issuer in relation to the product's review."

This means advisers will be prohibited from dealing in and providing advice on a product unless the issuer has provided a target market determination. If one has been made, they’ll have to take "reasonable steps" to ensure any advice provided is consistent with the target market determination and notify offerors (who will then be required to notify ASIC) of any significant dealing in a product that wasn't consistent.

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The issue is that should a product be found to be 'unsuitable' for a client it is likely to void professional indemnity insurance. As an example, an adviser could put part of a conservative investor's portfolio into a share fund for long term growth and although this is a legitimate use of the product, the specifications on that product will say that it has a time horizon of between 5 - 7 years and is suitable for a 'growth' investor. If we had another 1987 or GFC and the client decides to make a complaint, the PI insurer may refuse to payout. or, given the new legislation, increase premiums and retention amounts even more than they have recently. It is a dangerous and unnecessary piece of legislation that will not benefit the end consumer in anyway, except if they wish to make a complaint, which may be frivolous. Australia is fast becoming a Nanny state where the regulators and in particular the consumer groups, are driving unworkable regulations. Some years ago I attended a talk from one of these consumer groups and asked a question of the person talking. I simply asked what they were trying to achieve with financial services products. The answer was 'we want to make all products safe for the consumer!' I stated that 'safe' meant free of risk, and that there was no such product, other than the Government Guarantee Scheme. I received a blank look of non-comprehension. It amazes me that no one is looking at the frauds that are perpetrated on clients by the legal fraternity through trust accounts, or trust accounts of accountants and real estate agents.

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