The Australian Securities and Investments Commission’s (ASIC) product intervention powers (PIP) could present a challenge to companies that offer a wide range of products.
This is the position of Carole Ferguson, GRCI’s Strategic Stakeholder and Engagement Consultant, who has significant experience working in the finance sector, well as with regulators of the financial industry.
“It will be a big stretch for organisations that offer a lot of products. The legislation gives ASIC the power to issue a ‘product intervention order’ if the regulator is satisfied that a financial product or a credit product ‘has resulted in or will, or is likely to, result in significant detriment’ to retail clients or consumers (as applicable).”
Last week, ASIC asked for consultation around their product intervention powers, with the deadline for submissions on 7 August of this year.
At this year’s ASIC regulatory summit, ASIC addressed their ‘Why not regulate?’ approach and their use of the regulatory toolkit. PIP is one of the major tools in the toolkit expected to tackle the distribution of inappropriate products.
“The PIP is an incredibly important addition to ASIC’s regulatory toolkit. ASIC can now step in and respond to significant consumer detriment in a targeted and timely way. But there are also important checks and balances—it is a temporary intervention power, and we must consult before each and every use,” ASIC Deputy Karen Chester said.
In the consultation paper, released late last month, the regulator writes that PIP will allow them to tackle ‘significant consumer detriment’ as well as ‘market -wide problems.’
The regulator is seeking definitive terms around:
Significant consumer detriment.
Considerations about how the regulator will intervene.
What information should be included in an intervention order?
The question of whether to delay the commencement of the product intervention order?
The impact of PIP
Meeting these obligations will be no small task, Ferguson told GRC Professional. Essentially, every product will need to be classified as retail or wholesale. This will need to be followed with a target market determination for each product that will also need to be reviewed and publicised.
But what kind impact will the powers really have on industry?
Ferguson indicated that this regulatory step came out of the Royal Commission’s recommendations to protect retail investors. And, previously, regulatory intervention in this space was problematic.
“It will be interesting to determine the ultimate impact on consumers. Up to now, there has been a view that to restrict retail involvement in high-risk products smacked of a ‘nanny state’ and that disclosure of itself was sufficient to equip retail customers with information regarding the risks and rewards of various investments,” Ferguson explained.
A curse and a blessing
The GRC Professional reached out to Dr Angus Young from Hong Kong Baptist University who said that product intervention powers were both a blessing and curse.
“It is a blessing because, with the rise of more complex financial products and fintech, both customers and investors are exposed to unprecedented levels and types of risks. Powers for ASIC to intervene when needed to stop certain products being sold to investors would help to safeguard investors from highly-risky products that are packaged as safe investments, like structured financial products that are, in fact, not 'safe'.”
However, should the regulator be held to account, as they were during the Royal Commission, if their failure to use this tool effectively renders them complicit in an instance of ‘significant consumer detriment’?
“It is a curse too, as regulators are asked to make regulatory judgement on financial instruments that are important to ensure market efficiency and provide liquidity to the market,” said Young. “Even if regulators were former financial practitioners, it is impossible to get it right all the time. Furthermore, if the regulator deemed a certain product to be safe or not highly risky, but it turned out to be the opposite, then is it the sole fault of the regulator? Because if certain financial products cause heavy financial losses to investors, then the regulator would be blamed for not intervening.”
On balance, it is probably better to have such powers than not. However, their effectiveness depends heavily on the regulator's judgement. Thus, the situation is not as straightforward as taking aim and pulling the trigger.
Regulated entities still have a lot of work to do to review and classify the products they have.
In her statement, Chester stressed that the PIP is not a new concept. It is being brought in by the UK’s Financial Conduct Authority (FCA) and the European Securities and Markets Authority (ESMA). It has also been rolled out in countries such as Hong Kong and Taiwan. Yet, it remains to be seen how effective the approach will be in the Australian market.