Under pressure from Labor to protect bank customers, and following a ‘detailed consultation’ with the banking industry by the Australian Treasury for the past month, the federal government yesterday announced a boost to the powers currently held by the Australian Securities and Investments Commission (ASIC).

These powers will not be funded by taxpayers, but for the most part via a $121 million contribution from industry (with an extra $6 million to be used for administering the changes, bringing the total extra funds to $127 million).  How will these funds be used?  $61 million will be used for enhanced data analytics and surveillance capabilities.  A further $57 million will go towards increased surveillance, investigation and prosecution capacity to pursue cases.

The announcements include the appointment of an additional ASIC commissioner with prosecution expertise, and a recommendation that the Financial Services Ombudsman Australia (FOS) change its thresholds to provider greater access for claims, not only to individuals but also to small businesses. However, before such changes can be implemented, the government will need to issue a legislative report to FOS.

The new powers will include a ‘product intervention power’ and the appointment of a special prosecutor to pursue those caught breaking the rules.  Industry will also be subject to a new ‘product design and distribution obligation’.

These powers aim to prevent the selling of inappropriate products to customers.  The final report of the financial system inquiry (FSI) pointed to various contracts where product design and distribution controls were unsatisfactory, such as consumer credit insurance.

Using the product intervention power, ASIC will be able to amend marketing materials, insist on warnings to customers, restrict distribution or even ban products (in extreme circumstances).

The product design and distribution obligation will require industry to ‘stress-test’ products and determine how they should be distributed.  They will also need to take into account the risk/return profile of their customers and make sure a product is suitable.

Consumer advocates strongly support the proposed laws, and believe that the FSI provides the government with backing to introduce the new laws quickly.

The industry welcomes these changes, although the Australian Bankers’ Association has said that there is a need to be wary of any action that may have unintended consequences and adversely impact on product innovation.

In the wake of the announcement, ASIC has indicated that it will focus its new powers on a number of areas such as financial advice, responsible lending, credit card marketing, loan fraud, and various practices within the insurance sector including claims handling and add on insurance products.