Draft legislation to give ASIC a product intervention power in relation to financial products and credit products has been released by Treasury.
Submissions on the draft legislation are due by 9 February 2018.
This article focuses on the provisions relating to credit products.
If ASIC is satisfied that a business is engaging in or is likely to engage in a credit activity which has or is likely to result in significant detriment to consumers, ASIC may order that the specified conduct cease or is modified. Engaging in a credit activity will include businesses conducting lending and finance broking.
The matters that ASIC can consider when deciding whether a credit product may result in significant detriment to consumers are not limited. However, ASIC must consider the nature and extent of the detriment and the actual or potential financial loss or detriment to consumers. ASIC will have the ability to make such an order even though the product strictly complies with the National Credit Code. However, the provisions appear to have no application, if a product is structured so that it is not regulated by the National Credit Code.
ASIC must not make a product intervention order unless it has consulted with persons reasonably likely to be affected by the proposed order. This would include both the business and its potential customers. ASIC’s consultation can occur by publication on ASIC’s website. ASIC must also first consult with APRA in respect of businesses that are regulated by APRA. A question arises as to how the extension of APRA’s powers in relation to non-bank lenders will apply here.
Product intervention orders must have a maximum term of 18 months. However, it is proposed that the relevant minister can, by legislative instrument, make an order permanent, or in force for a specified period.
For each product intervention, ASIC must publish a notice on its website describing the credit products, the significant detriment to consumers, the terms of each order, the date the order is to commence, the consultation ASIC has undertaken and the reasoning as to why the order appropriately reduces significant detriment.
ASIC can require businesses affected by an order to notify affected customers about the order.
Implications for businesses and consumers
Most people will support a regime that prevents consumer detriment and bans ‘bad’ products, and Dentons has spoken in favour of a product intervention power to stop bad conduct in its tracks.
However, problems may arise because consumers often want to borrow in circumstances where regulators consider they shouldn’t borrow. There is potential here for a mismatch between consumers’ ‘naïve’ wishes and regulators’ ‘superior’ knowledge of what’s best for consumers. There have been several high profile examples in recent years of major differences in approach, such as the abolition of deferred establishment fees (which were introduced by non-bank lenders to allow for honeymoon rates and lower establishment fees) and SACC loans (wanted by consumers but disliked by regulators because of the financial impact on borrowers).
The residual concern for businesses developing new products is whether the power will always be exercised appropriately. The initiative needs to be supported by ASIC providing collaborative access to product developers to discuss new initiatives.