The Final Report considered that the current framework is insufficient to deliver fair treatment to consumers (fair treatment being where financial products and services perform in the way that consumers are led to expect) and identified shortcomings in disclosure and financial advice as being the most significant problems.

The Final Report noted that mandated disclosure is not, of itself, sufficient to allow consumers to make informed decisions and made a number of recommendations, many of which are designed to increase the accountability of issuers and distributors:

Expanding Issuers’ And Distributors’ Accountability And Introducing A Product Intervention Power.

1. More issuer and distributor accountability: The Final Report recommended that, to promote positive consumer outcomes, product issuers and distributors should take greater responsibility for the design and targeted distribution of products. This was on the basis that this should strengthen consumer confidence and trust in the system and reduce the extent to which consumer behavioural biases and information imbalances are disregarded. 

Importantly for issuers, the Final Report did not recommend the introduction of individual appropriateness tests at the point of sale for complex products (an option proposed in the Interim Report and being implemented in other jurisdictions), recognising the significant cost to business of this option.

The suggested power is broad (extending to product banning) but is limited to a temporary intervention of 12 months – although that period could be extended by Government if more time was needed either by industry to change its relevant practices or for Government to implement permanent reform.

Notwithstanding these limitations and that the Final Report recommends ‘[the] regulator … be held to a high level of accountability for its use’, this power could be used where there is no demonstrated or suspected breach of the law, which is a significant departure from the current law and has the potential to create significant uncertainty for industry.  In addition the express limits on the power may prove to be cold comfort to issuers or distributors if in practice it can be used in a manner which makes successful issues of products that ASIC deems undesirable simply impracticable, or the Government readily extends a 12 months ban on the basis of ASIC recommendations.

There is some good news for issuers – the Final Report did not recommend the introduction of default products (one option considered in the Interim Report) or prohibiting the distribution of certain classes of products to retail consumers.

Focusing On The Interests Of Consumers.

The Final Report recommended that, to build confidence and trust, industry participants create a culture that focuses on consumer interests.

This includes a recommendation to give ASIC enhanced powers to ban individuals from financial firm management, increasing minimum competency standards for financial advisers and relabelling general advice.

Facilitating Innovative Forms Of Disclosure, Including Promoting Technology Use.

The Final Report noted that although the disclosure regime has evolved to reduce complexity over the last decade, consumer behavioural biases and commercial disincentives limit its effectiveness. This observation is consistent with ASIC’s observations about behavioural economics.

The Final Report noted that risk and fee disclosure remains variable and consumer understanding is low and suggested promoting the efficient communication of information to consumers in a way that responds to technological advances and changing consumer preferences. 

The Final Report also suggested:

• the removal of ‘regulatory impediments to innovative product disclosure and communication with consumers’, and improvement in ‘the way risk and fees are communicated to consumers’,
• aligning the interests of financial services firms and consumers through an increase in industry standards, improved banning powers, and ensuring remuneration structures in life insurance and stockbroking don’t affect the quality of advice,
• raising ‘competency of financial advice providers’ and the introduction of ‘an enhanced register of advisers’, and
• the renaming of general advice to ‘a more appropriate, consumer-tested term’.

Pleasingly, we note that suggestions made by Herbert Smith Freehills, in submissions responding to the Interim Report, for more innovative ways to make disclosure to consumers (by the better utilisation of technology to ensure that clients are aware of the contents of disclosure documents and for ‘facilitative regulation’ in respect of product disclosure by making electronic disclosure the default position) are reflected in the Final Report.

Related:

1. ASIC Funding, Resources, And Powers

2. Bank Funding, Prudential Regulation, And Disclosure

4. General Advice Superannuation And Life Insurance

5. Innovation And Technological Change

For further information, please contact:

Paul Hughes, Partner, Herbert Smith Freehills

[email protected]

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