Financial services: Here comes the shift in liability
In a move that has been long awaited, it was recently announced that new regulatory obligations were announced that will shift some liability to financial product issuers for poor client outcomes.
In a speech on 17 July 2018 by Peter Kell, Deputy Chair of ASIC, the following comments were made:
There are several other areas of regulatory reform which will play an important part in addressing the 'trust deficit', and improving standards in the financial services sector.
These are financial product design and distribution obligations and the introduction of product intervention powers for ASIC.
The design and distribution obligations will apply to issuers or distributors, and would be imposed at the stage of product design and distribution, and after the sale of the product. This last point is important. What we have seen again and again in this sector is that the upfront offer to the customer is imply not matched by post-sales experience. The charging of ongoing fees without providing a service in the financial advice sector is but one example. I'm going to talk about this point - the divergence between the promise and the performance, in more detail in a moment.
These obligations will bring accountability to issuers and distributors of products by requiring them to establish processes and controls for ensuring products are designed with customer needs and understanding in mind, and are marketed to section of the population for whom they are useful and appropriate.
This is the potential introduction of powers that are similar to those already introduced in the United Kingdom. In the UK, regulators had recognised that relying on enforcing a fair sales process and transparent product disclosure had been an insufficient way to protect consumers in circumstances where there had been product failures.
Australia has had a similar experience in circumstances where there had been large product failures around the time of the GFC, with financial products like Westpoint and the multitude of agribusiness style products coming to mind.
The response of the UK government was to make product issuers and distributors subject to a "treating customers fairly" obligation in an effort to improve outcomes for retail investors. This requires product issuers and distributors to ensure that financial products sold to retail clients are "designed to meet the needs of identified consumer groups and are targeted accordingly."
In the speech by Peter Kell it was envisioned that there would be two types of powers created by the proposed reforms:
1. Accountability for issuers and distributors so that client needs are considered when issuing financial products; and
2. A product intervention power for ASIC that would enable it to intervene where a product is identified as creating a significant consumer detriment.
The impact of any change would be significant in terms of potential remedies for clients who have suffered loss. It would mean multiple options for clients who have suffered loss and may also significantly complicate the handling of complaints.
It would also potentially create a much more interventionist ASIC, if the expanded scope of powers were used to their fullest extent.
While nothing has been legislated as yet it would be important for product issuers and distributors to start building in this anticipated change to their risk management processes.
For financial advice groups it would additionally be important that they begin speaking with issuers and distributors about the reforms when reviewing their Approved Product Lists.