Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 1 Design and distribution obligations

Outline of chapter

1.1 Schedule 1 to the Bill amends the Corporations Act to introduce design and distribution obligations in relation to financial products. It sets out:

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the new obligations;

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the products in relation to which the obligations apply;

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ASIC's powers to enforce the obligations; and

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the consequences of failing to comply with the obligations.

Context of amendments

1.2 The Corporations Act relies heavily on disclosure to assist consumers understand and select appropriate financial products. However, disclosure can be ineffective for a number of reasons, including consumer disengagement, complexity of documents and products, behavioural biases, misaligned interests and low financial literacy. The availability of financial advice may not be sufficient to overcome these issues. A consumer may not seek financial advice or may receive poor-quality advice.

1.3 The Financial System Inquiry recognised these shortcomings of the existing disclosure regime. ^[1] In response, it recommended the introduction of a targeted and principles-based product design and distribution obligation. ^[2] The Government accepted this recommendation to introduce design and distribution obligations on 20 October 2015. ^[3]

1.4 On 13 December 2016, the former Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP, released a proposals paper on the implementation of the obligations. ^[4]

1.5 These obligations are designed to assist consumers to obtain appropriate financial products by requiring issuers and distributors to have a customer-centric approach to designing, marketing and distributing financial products.

1.6 The Department of the Treasury has considered the compliance costs associated with implementing the new design and distribution obligations. The department's analysis is in Chapter 3.

Summary of new law

1.7 Schedule 1 to the Bill amends the Corporations Act to introduce design and distribution obligations in relation to financial products. These new obligations improve consumer outcomes by ensuring that financial services providers have a customer-centric approach to making initial offerings of products to consumers.

1.8 The obligations generally apply to offers of financial products about which the offeror must make disclosure under the Corporations Act. This consists of products that require a disclosure document, such as a product disclosure statement or prospectus. There are, however, exceptions for products and distribution methods where there are existing similar regimes or other competing policy priorities. The obligations also apply to financial products that are not regulated under the Corporations Act, but are regulated under the ASIC Act (which includes credit).

1.9 The new law gives ASIC powers to enforce the new arrangements. These include the ability to request necessary information, issue stop orders where there is a suspected contravention of the law and to make exemptions and modifications to the new arrangements. These powers are similar to those that ASIC has under the current disclosure regime.

1.10 There are civil and criminal penalties that apply to contraventions of the new arrangements. The combination of civil and criminal penalties allows ASIC or the prosecutor (as the case may be) to take a proportional approach to enforcing the new obligations. In addition, a person who suffers loss or damage because of a contravention of certain new obligations may recover that loss by bringing a civil claim.

Comparison of key features of new law and current law

Detailed explanation of new law

1.11 Schedule 1 to the Bill amends the Corporations Act to introduce design and distribution obligations in relation to financial products.

1.12 The object of the new design and distribution regime is to promote the provision of suitable financial products to consumers. In particular, the new regime requires issuers and distributors to appropriately market and distribute financial products to consumers. [Schedule 1, item 1, paragraph 760A(aa) of the Corporations Act]

1.13 To achieve this objective the Bill inserts a new part into the Corporations Act that contains the new design and distribution regime and associated provisions. The new part details:

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the products to which the new regime applies;

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the content of the new obligations;

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ASIC's powers with respect to the new regime; and

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the consequences of failing to comply with the obligations.

To which products do the new obligations apply?

1.14 The obligations generally apply to offers of financial products that require disclosure under the Corporations Act. This consists of products that:

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require disclosure in the form of a product disclosure statement under Part 7.9 (Financial product disclosure) of the Corporations Act; or

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require disclosure to investors under Chapter 6D (Fundraising) of the Corporations Act; and

[Schedule 1, item 5, subparagraphs 994B(1)(a)-(b) of the Corporations Act]

1.15 What is a financial product is determined according to the existing provisions of Division 3 of Part 7.1 of the Corporations Act and applicable definitions in Chapter 7. ^[5] [Schedule 1, item 5, paragraphs 994AA(a) of the Corporations Act]

1.16 Some products requiring disclosure are exempt from the new regime: MySuper products, margin lending facilities, securities issued under an employee share scheme and fully-paid ordinary shares. The regulations may also apply the new regime to additional financial products or provide additional exemptions from its operation. In addition, the new regime does not apply to financial products offered by an exempt body or an exempt public authority. [Schedule 1, item 5, section 994A, paragraph 994B(1)(c) and subsection 994B(3) of the Corporations Act]

1.17 The obligations also have an extended application in relation to financial products that are not regulated under the Corporations Act, but are regulated under the ASIC Act. [Schedule 1, item 5, paragraphs 994AA(b) and 994B(1)(ba) of the Corporations Act]

Financial products requiring a PDS

1.18 The new design and distribution regime generally applies to a financial product ^[6] if a disclosure document in the form of a PDS must be prepared for it. Under Subdivision C of Division 2 of Part 7.9 of the Corporations Act a PDS has to be prepared where one is required to be given under Subdivision B of the same division and part of the Act. In particular, sections 1012A and 1012B provide that a PDS must be given whenever a regulated person ^[7] recommends or issues a financial product to a retail client. [Schedule 1, item 5, paragraph 994B(1)(b) of the Corporations Act]

1.19 A regulated person does not generally need to give a PDS in relation to a sale of a financial product. A sale occurs when a financial product is sold by, or purchased from, a person who acquired the product at or after its issue. ^[8] However, section 1012C requires a PDS to be given in sale situations which could otherwise be used to avoid the requirement to give a PDS. These situations include: off-market sales where the seller controls the issuer; sales amounting to an indirect issue; and indirect off-market sales where the seller controls the issuer. The term 'regulated sale' is used to describe these sale situations in the new regime. [Schedule 1, item 5, section 994A, paragraph 994B(1)(b) of the Corporations Act]

1.20 There are several benefits of linking the new design and distribution obligations to the existing requirement to provide a PDS. It:

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links the new regime to the principal problem it seeks to address, that is, shortcomings of the current disclosure regime;

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provides clarity about when the new regime applies, reducing uncertainty and compliance costs for business; and

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allows the existing legislative framework for PDSs to apply to the new regime. ^[9]

1.21 Nonetheless, some financial products requiring a PDS are not subject to the new design and distribution regime: MySuper products and margin lending facilities. ^[10] These products are currently subject to product-specific regulations that are also aimed at ensuring that firms provide appropriate products to consumers. ^[11] MySuper products are subject to special rules under the Superannuation Industry (Supervision) Act 1993. Similarly, margin lending facilities are subject to Division 4A (special provisions relating to margin lending facilities) of Part 7.8 of the Corporations Act. [Schedule 1, item 5, subsection 994B(3) of the Corporations Act]

Securities requiring disclosure

1.22 The new design and distribution regime also applies to financial products for which a disclosure document must be prepared under Part 6D.2 of the Corporations Act. Under Division 4 of Part 6D.2 a disclosure document must be prepared for offers of securities that require disclosure. [Schedule 1, item 5, paragraph 994B(1)(a) of the Corporations Act]

1.23 The requirement to provide a PDS does not apply to securities. ^[12] Chapter 6D of the Corporations Act provides for disclosure for offers relating to securities. Section 700 defines 'securities' for the purposes of Chapter 6D of the Corporations Act as meaning: a share in a body; a debenture of a body (except a simple corporate bond depository interest issued under a two-part simple corporate bonds prospectus); or a legal or equitable right or interest in such a share or debenture. ^[13]

1.24 Part 6D.2 of the Corporations Act details when an offer of securities requires disclosure. Section 706 provides that issues of securities generally require disclosure and section 707 requires disclosure in certain sale situations which could otherwise be used to avoid the requirement to disclose. The sale situations covered by section 707 reflect those requiring a PDS under section 1012C, referred to above. Again, the term 'regulated sale' is defined in the new regime to cover these sale situations.

1.25 Section 708 provides exceptions to the requirement to disclose under Part 6D.2. These exceptions are:

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small scale offerings;

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offers to sophisticated or professional investors;

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certain offers to present holders of securities; ^[14]

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issues or sales for no consideration;

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offers to people associated with a senior manager of the body;

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offers under a deed of company arrangement or a compromise or arrangement under Part 5.1;

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offers relating to takeovers, exempt bodies (non-companies incorporated under state law ^[15] ) and exempt public authorities; and

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offers relating to debentures in ADIs or life insurers.

1.26 As these products are excluded from disclosure under Part 6D.2, they are not subject to the new design and distribution regime.

1.27 There are benefits of linking the application of the design and distribution regime to the requirement to disclose under Part 6D.2. These are similar to those already discussed in the context of products requiring a PDS.

1.28 There are some securities that require disclosure under Part 6D.2 that are not subject to the new design and distribution regime. These are fully paid ordinary shares in a company or foreign company and securities issued under an employee share scheme.

1.29 Fully paid ordinary shares are excluded as they are fundamental to corporate fundraising. ^[16] 'Fully paid share' is defined in section 9 of the Corporations Act to mean a share on which no amount remains unpaid. The exception therefore only applies in relation to ordinary shares where no amount remains unpaid. In such situations the full extent of the investor's exposure to loss is represented by the paid-up amount on the shares. [Schedule 1, item 5, paragraph 994B(3)(d) of the Corporations Act]

1.30 Securities issued only under employee share schemes are excluded because they are a mechanism by which employees can become part owners in the company for which they work. ^[17] In addition, products issued under an employee share scheme must be fully paid ordinary shares, units in fully paid ordinary shares, or options issued for nominal consideration for such shares. ^[18] [Schedule 1, item 5, paragraph 994B(3)(c) of the Corporations Act]

1.31 The exemption of fully paid ordinary shares from the new regimes requires two anti-avoidance provisions.

1.32 The first anti-avoidance provision ensures that the new regime applies to issues of ordinary shares where the company intended that those shares be converted into preference shares within 12 months after issue. ^[19] This ensures that the operation of the new regime cannot be avoided by a company that may seek, in effect, to disguise an issue of preference shares as an issue of ordinary shares. [Schedule 1, item 5, paragraph 994B(4)(a) of the Corporations Act]

1.33 The second anti-avoidance provision ensures that the new regime can apply where a company issues ordinary shares to carry on a business of investing in financial products or other investments. This prevents a person avoiding the new regime by effectively selling a product through an investment company. It also ensures the new regime extends to issues of ordinary shares in investment companies more generally, in recognition of the derivative nature of their business model. [Schedule 1, item 5, paragraph 994B(4)(b) of the Corporations Act]

Extended application to ASIC Act products

1.34 The obligations also apply to products that are not regulated under the Corporations Act, but are regulated under Division 2 of Part 2 of the ASIC Act, which includes credit. Associated amendments are made to ensure that the new regime can operate effectively in relation to those ASIC Act products to which it now also applies, given that the regime is enacted within the Corporations Act. [Schedule 1, item 5, Section 994AA and paragraph 994B(1)(ba) of the Corporations Act]

Products prescribed by the regulations

1.35 The new design and distribution regime also applies to any financial product prescribed by the Minister in regulations. This regulation making power means the new regime can apply to any prescribed financial product in any prescribed circumstance, regardless of whether or not the product requires disclosure. By doing so, the power provides the flexibility necessary to future-proof the new regime to ensure its ongoing relevance and effectiveness. Any regulations would be subject to parliamentary scrutiny through the disallowance procedures of the Legislation Act 2003. [Schedule 1, item 5, paragraph 994B(1)(c) and paragraph 994B(2)(b) of the Corporations Act]

1.36 At the outset, the Government proposes to make regulations that would apply the regime to a number of products that do not presently require disclosure. These products are:

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simple corporate bonds depository interests in simple corporate bonds, where the simple corporate bonds are, or are to be, issued under a two-part simple corporate bonds prospectus;

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debentures of a body that is an Australian ADI or registered under section 21 of the Life Insurance Act 1995;

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basic deposit products; and

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custodial arrangements that are not already subject to the new regime, including an interest in an investor directed portfolio service.

1.37 The regulations may also exclude a product from the new regime. Again, this regulation making power is aimed at future proofing the new regime by providing flexibility to exempt products where appropriate. [Schedule 1, item 5, paragraph 994B(3)(f) of the Corporations Act]

1.38 At the outset, the Government proposes to make regulations that would exclude a number of products from the regime. These products are:

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depository interests in fully paid foreign ordinary shares that would, if offered directly to retail clients, be excluded from the regime;

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medical indemnity insurance;

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interests in defined benefit superannuation funds; and

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interests in eligible rollover funds.

1.39 In addition, the new regime does not apply to financial products offered by an exempt body or an exempt public authority. An exempt body is a non-company body corporate that is incorporated by or under a law of a state or territory. ^[20] An exempt public authority is a body corporate that is incorporated within Australia or an external Territory that is a public authority or an instrumentality or agency of the crown in right of the Commonwealth, a state, or a territory. ^[21] [Schedule 1, item 5, section 994A, paragraph 994B(3)(e) of the Corporations Act]

1.40 All references to 'financial products' are references to products to which the new regime applies unless indicated otherwise.

`What are the design and distribution obligations?

1.41 The new law inserts four design obligations and five distribution obligations for product issuers and distributors into the Corporations Act.

1.42 The design obligations are:

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to make a publicly available target market determination;

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to review the target market determination as required to ensure it remains appropriate;

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to keep records of the person's decisions in relation to the new regime; and

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to notify ASIC of any significant dealings in a product that are not consistent with the product's target market determination.

1.43 The distribution ^[22] obligations are:

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not to engage in 'retail product distribution conduct' in relation to a product unless a target market determination has been made;

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'retail product distribution conduct' is, in relation to a product, dealing in relation to a retail client, providing financial product advice to a retail client, or giving a disclosure document or PDS to a retail client;

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not to engage in retail product distribution conduct where a target market determination may no longer be appropriate;

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to take reasonable steps so that retail product distribution conduct is consistent with the target market determination;

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to collect information specified by the issuer and complaints related to a product and provide both to the issuer; and

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to notify the issuer of a product of any significant dealings in the product that are not consistent with the products target market determination.

1.44 In addition, the new law amends existing section 1018A of the Corporations Act to require advertising or other promotional material for a financial product to refer to the product's target market. [Schedule 1, item 6 and 7, subparagraphs 1018A(1)(ca) and 1018A(2)(ca) of the Corporations Act]

1.45 The new obligations only apply to primary or initial offerings of financial products to retail clients. They do not apply to sales of products on secondary markets unless such sales are made in circumstances that could otherwise be used to avoid the obligations. These situations are those already discussed in paragraphs 1.19 and 1.24 of this memorandum. This means that the obligations cease to apply if the product is no longer available to consumers by way of primary or initial offering. ^[23]

Design obligations

1.46 The design obligations are imposed on the person who is responsible for developing the financial product. This is the person who is responsible for preparing the disclosure document ^[24] for the product. ^[25] All references to 'issuer' are references to the person who is subject to the design obligations unless a contrary intention is indicated. [Schedule 1, item 5, subsection 994B(1) of the Corporations Act]

Obligation to make a publicly available target market determination

1.47 The first design obligation requires an issuer to make a 'target market determination' for their product. There are a number of requirements that must be met for such a determination to be validly made. In particular, the target market determination must:

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be in writing

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describe the class of retail clients that comprise the target market for the product (the target market); ^[26]

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specify any conditions and restrictions on retail product distribution conduct (the distribution conditions); ^[27]

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specify events and circumstances that would reasonably suggest the determination is no longer appropriate (review triggers);

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specify maximum review periods (review periods); and

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specify reporting periods for when complaints about the product should be provided from the distributor to the issuer:

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specify kinds of information needed to promptly determine that a determination may no longer be appropriate, along with;

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which distributors should provide those kinds of information; and

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reporting periods for when that information should be provided by the distributors to the issuer.

[Schedule 1, item 5, section 994A, subsection 994B(5) of the Corporations Act]

1.48 The purpose of these requirements is to ensure issuers design products for which an appropriate target market can be defined, or conversely to consider whether the planned target market for products under development is appropriate; and whether there are distribution channels to that market which are feasible and appropriate.

1.49 The target market determination must be made available to the public free of charge. This is to mitigate evidential difficulties with substantiating non-compliance with target market determinations. It also enables consumers to access a target market determination should they wish to do so. The requirement applies to both past and present determinations in relation to the product. [Schedule 1, item 5, subsection 994B(9) of the Corporations Act]

1.50 The new regime also provides for when the target determination must be made. In particular, the determination must be made before distribution occurs, or in the case where regulations require the determination be made - before the time or event specified in those regulations (or before distribution occurs if no such time or event is specified). [Schedule 1, item 5, paragraph 994B(2)(b) of the Corporations Act]

Determinations must be in writing

1.51 The new law provides that a target market determination must be in writing. However, it does not prescribe any particular form for the written determination. This allows issuers to determine the most effective and efficient form for a determination given the particular product involved and their existing systems and processes. [Schedule 1, item 5, paragraph 994B(5)(a) of the Corporations Act]

Target market and distribution conditions

1.52 A target market determination must detail the product's target market and distribution conditions. The determination must also be appropriate having regard to the target market and distribution conditions. [Schedule 1, item 5, paragraphs 994B(5)(b) and (c) and subsection 994B(8) of the Corporations Act]

1.53 The new regime sets out when a target market determination is appropriate. In particular, for the determination to be appropriate it must satisfy two requirements. These requirements are that it be reasonable to conclude that if the product were to be issued, or sold in a regulated sale:

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to a retail client in accordance with the distribution conditions - it would be likely that the retail client is in the target market; and

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to a retail client in the target market - it would likely be consistent with the likely objectives, financial situation and needs of the retail client.

[Schedule 1, item 5, subsection 994B(8) of the Corporations Act]

1.54 These requirements are objective. They do not require an issuer to have knowledge about individual consumers.

1.55 The first requirement focuses on the likelihood of a retail client being in the target market for a product given the distribution conditions proposed by the issuer. This requirement enables an issuer to determine a wide range of distribution conditions applicable to a product, provided they are likely to direct distribution to consumers in the target market. [Schedule 1, item 5, paragraph 994B(8)(a) of the Corporations Act]

1.56 An issuer must consider a wide range of factors in determining whether their selected distribution conditions are appropriate. Factors may include known diligence, capabilities and the integrity of existing and prospective distribution methods. For example, an issuer may consider previous instances where a product was issued through a specific distribution method as part of its assessment to determine the appropriateness of that distribution method.

1.57 The second requirement focuses on the likelihood of a product being appropriate for the retail clients in the target market. Whether a product is appropriate is determined by reference to whether it is likely to be consistent with the likely objectives, financial situation and needs of the retail clients. Again, this formulation provides flexibility to an issuer in determining the appropriate target market for a product. For example, it would enable an issuer to conclude that it is appropriate for a product to be issued to an investor as part of balanced portfolio, even if it would not otherwise be appropriate for the investor. [Schedule 1, item 5, paragraph 994B(8)(b) of the Corporations Act]

1.58 The amendments use language similar to that currently used in the Corporations Act in the context of personal advice. In particular, it must be reasonable to conclude that if the product were issued or sold it would "likely be consistent with the likely objectives, financial situations and needs of persons in the target market" [emphasis added]. This reflects that the factors that are important to providing good personal advice are also important to good product design, particularly when determining the hypothetical consumers in a product's target market. The use of this language does not reflect a requirement to take into account the personal circumstances of any particular person or to provide personal advice.

1.59 An issuer must take into account all relevant factors in determining whether a product is likely to be consistent with the likely objectives, financial situations and needs of persons within the target market. Relevant factors may include:

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the key features of the product, including its complexity, risk profile (over the lifetime of the product), any applicable fees, and the investment needs that the product is seeking to meet; and,

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the circumstances of persons within a particular market, such as their understanding of product features, capacity to meet financial obligations or bear losses, and whether their investment needs are the same as those the product seeks to meet.

1.60 These are just two examples of potential factors that may need to be taken into account in making a target market determination. There are likely to be other factors that need to be taken into account.

Review triggers and review periods

1.61 As part of making the target market determination the maker must:

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identify events and circumstances (called 'review triggers') that would reasonably suggest that the target market determination is no longer appropriate; and

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determine the maximum period between reviews of the target market determination (called the 'review period'), which must be reasonable in the circumstances.

[Schedule 1, item 5, section 994A and paragraphs 994B(5)(d), (e) and (f) of the Corporations Act]

1.62 The requirement on a product issuer to determine review triggers ensures that they review and remake a target market determination when events or circumstances suggest that it may no longer be appropriate. What may constitute a review trigger will vary from product to product depending on the nature of the product and the circumstances surrounding its issue, including the way in which it is distributed. For this reason, it is not possible to provide a definitive statutory list of possible review triggers. However, some examples of the broad range of possible review triggers include:

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an event or circumstance that would materially change a factor taken into account in making the target market determination for the product;

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whether the product is being distributed and purchased as envisaged by its target market determination; and

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the nature and extent of any feedback received from those who distribute or acquire the product.

1.63 Issuers must also determine review periods for a target market determination. The review periods are: the maximum period of time that elapses between the making of the determination and finishing the first review; and the maximum period between completed reviews of a determination. These periods must be reasonable in the circumstances to ensure that a determination does not become inappropriate over time. [Schedule 1, item 5, section 994A and paragraphs 994B(5)(d)(e) and (f) and subsection 994B(6) of the Corporations Act]

1.64 What a reasonable period is in the circumstances will vary from product to product. However, in determining what is reasonable for this purpose, regard must be had to:

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the need to identify promptly whether a review trigger or other event or circumstances would reasonably suggest the determination is no longer appropriate; and

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the likelihood, nature and extent of detriment to consumers that may result if a review trigger or another event or circumstance that would reasonably suggest that the target market determination is no longer appropriate, has occurred, and the target market determination is not promptly reviewed. [Schedule 1, item 5, section 994A and subsection 994B(7) of the Corporations Act]

1.65 The requirement that review periods be reasonable is designed to encourage an issuer to adopt a risk management approach in determining a reasonable review period. Under such an approach the review periods applicable to a product would generally shorten as its complexity and risk profile increases. Similarly, the maximum period between reviews would generally be shorter where an issuer has limited experience issuing similar products or is yet to establish a proven distribution network.

Information requirements

1.66 Issuers must also specify in the target market determination:

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kinds of information needed to enable the issuer to promptly identify review triggers or other events and circumstances that have occurred which would reasonably suggest the determination is no longer appropriate;

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for each kind of information specified above, the distributors that should be required to provide that information to the issuer and the corresponding reporting periods; and

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reporting periods for reporting information about the number of complaints about a product. [Schedule 1, item 5, paragraphs 994B(5)(g) and 994B(5)(h) of the Corporations Act]

1.67 The reporting periods specified by the issuers must be reasonable in the circumstances. The test for determining the reasonableness of the reporting periods is the same as that described in paragraph 1.64 in relation to determining the reasonableness of the periods applicable to reviewing the target market determination. [Schedule 1, item 5, section 994A and subsections 994B(6) and 994B(7) of the Corporations Act]

1.68 Together, these requirements create a flow of information from the distributor to the issuer that will facilitate the issuer's review obligations relating to target market determinations. This process is designed to help issuers ensure that reviews of target market determinations can be conducted effectively, efficiently and with appropriate distribution information.

Obligation to review a target market determination

1.69 The second design obligation requires an issuer to review a target market determination for a financial product:

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during a review period; and

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when a review trigger occurs, or an event or circumstance occurs that would reasonably suggest that the target market determination is no longer appropriate.

[Schedule 1, item 5, subsections 994C(2) and (3) of the Corporations Act]

1.70 The first mentioned review obligation relates to periodic reviews. In effect, it requires issues to complete a periodic review of a target market determination, where a review has not otherwise been undertaken during a review period. The obligation applies to all financial products with a target market determination, but is particularly pertinent for complex products and products that are likely to be issued over an extended period of time. The obligation does not apply where a product is no longer on offer for acquisition by issue, or regulated sale, to retail clients. [Schedule 1, item 5, subsection 994C(2) of the Corporations Act]

1.71 This requirement to review the target market determination during the review period ensures there is a periodic assessment of whether the target market determination remains appropriate. In particular, that the target market, distribution conditions, information requirements and review arrangements for the product remain appropriate.

1.72 The second review obligation provides for triggered reviews. Under the obligation a review could be triggered by a pre-determined event or circumstance identified in the target market determination or by any other events or circumstances that suggest the target market determination is no longer appropriate. This requirement ensures, for example, that an assessment of whether the product is being distributed appropriately may be required in response to information about distribution the issuer receives over time. In practice, the issuer will be acting on:

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information specified by the issuer in the target market determination that is provided by distributors; and

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any other relevant information the issuer receives as part of its business activity or is otherwise aware of.

[Schedule 1, item 5, subsection 994C(3) of the Corporations Act]

1.73 As with periodic reviews, the obligation to conduct triggered reviews does not apply where a product is no longer on offer for acquisition by issue, or regulated sale, to retail clients. [Schedule 1, item 5, subsection 994C(3) of the Corporations Act]

1.74 Notwithstanding the above arrangements, an issuer may review a target market determination and make a new determination at any time. [Schedule 1, item 5, subsection 994C(1) of the Corporations Act]

1.75 The validity of a target market determination is not retrospectively affected by a review finding that it is no longer appropriate. Similarly, that a review finds a determination no longer appropriate is not in itself evidence that the determination may have been invalid at an earlier time. Provided such a determination complied with the requirements of the new regime, it would remain valid until it was found, on review, to no longer be appropriate. This is a natural consequence of the new regime, which includes the review obligations for the very reason that an appropriate determination may subsequently become inappropriate.

Record keeping obligation

1.76 The third design obligation requires issuers to keep records of their decisions about:

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a product's target market determination, review triggers, review periods, and other decisions relating to requirements for making target market determinations; and

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the reasons for those decisions. [Schedule 1, item 5, subsection 994F(1) of the Corporations Act]

1.77 These record keeping provisions support the effectiveness of the new regime. In particular, they ensure that evidence exists concerning an issuer's compliance with the new obligations. The records will assist issuers in meeting their design obligations, particularly those concerning the review of previous decisions. The records may also be requested by ASIC to support its compliance activities. [Schedule 1, item 5, section 994H of the Corporations Act]

1.78 The new record keeping provisions are supported by current provisions of the Corporations Act. In particular, it is presently an offence to destroy, conceal or falsify records required to be kept under a provision of Chapter 7 of the Corporations Act. ^[28] In addition, the Corporations Act currently provides that records required to be kept by a provision of Chapter 7 must be preserved for 5 years. ^[29] These provisions apply in relation to the new regime.

Obligation to notify ASIC of significant dealings that are not consistent with a product's target market determination

1.79 The fourth (and final) design obligation requires issuers to notify ASIC of significant dealings (except certain dealings connected to personal advice) in a product that are not consistent with the product's target market determination. Should an issuer become aware of such a dealing they must notify ASIC in writing as soon as practicable, and in any case within 10 business days. [Schedule 1, item 5, section 994G of the Corporations Act]

1.80 Consistent with existing provisions of the Corporations Act, 'significant' is not defined for the purposes of the new obligation. The meaning of significant is intended to take its ordinary meaning in the context of the new provision. Generally, this would require an issuer to inform ASIC of dealings that would be worthy of its attention having regard to the object of the new regime and ASIC's role as its regulator. However, ultimately whether or not a dealing is significant would be a matter to be determined in the circumstances of each case.

1.81 This notification obligation supports the effectiveness of the new regime. In particular, it ensures that ASIC is advised, where possible, of significant dealings in a product that are not consistent with its target market determination. By doing so, the requirement assists ASIC in making timely and appropriate decisions in support of the new regime.

Distribution obligations

1.82 The distribution obligations apply to those people that engage with a potential investor in relation to a product. These are the people responsible for making offers, or giving advice or disclosure documents, to potential investors. They will generally be the issuer of the product (where the issuer distributes their own product) or be person carrying on a financial services business in Australia. All references to 'regulated person' are references to a person responsible for the distribution obligations. ^[30] [Schedule 1, item 5, the definition of regulated person, section 994A of the Corporations Act]

1.83 Not all conduct of regulated persons is subject to the new distribution obligations. The new obligations only apply to where a regulated person engages in 'retail product distribution conduct'. What constitutes retail product distribution conduct is defined for the purposes of the new regime. In particular, a regulated person engages in such conduct ^[31] if they:

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issue or arrange to issue a financial product ^[32] ;

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provide financial product advice; or

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give a PDS or disclosure document;

[Schedule 1, item 5, the definition of 'retail product distribution conduct' in subsection 994A of the Corporations Act]

1.84 While retail product distribution conduct includes providing financial product advice, the new regime excludes personal advice and associated conduct from most of the new distribution obligations. This reflects that such conduct already involves consideration of the client's individual circumstances and is subject to the best interest obligations under Part 7.7A of the Corporations Act. ^[33] However, conduct related to personal advice is subject to the record keeping and notification obligations to ensure the effective operation of those obligations. [Schedule 1, item 5, the definitions of 'retail product distribution conduct', 'dealing', excluded conduct', and 'excluded dealing', subsection 994A of the Corporations Act]

Obligation not to engage in retail product distribution conduct unless a target market determination has been made

1.85 The first distribution obligation prohibits retail product distribution conduct in relation to a financial product if the issuer has failed to make a target market determination for the product. [Schedule 1, item 5, subsection 994D of the Corporations Act]

1.86 This obligation promotes the effectiveness of the new regime. It ensures the distribution of non-compliant products is minimised. It also provides an additional incentive for issuers to comply with their obligation to make a target market determination.

1.87 For the purposes of the obligation, there is a defence if a regulated person (except the issuer) makes all inquiries (if any) that are reasonable in the circumstances and believes on reasonable grounds that the determination has been validly made or that a determination does not need to be made. [Schedule 1, item 5, paragraph 994D(c) of the Corporations Act]

1.88 This defence ensures that a regulated person does not need to make undue inquiries as to whether or not an issuer has complied with their design obligation to make a target market determination. However, where reliance on a determination (or lack thereof) is not reasonable, for example, because it is not in writing or appears obviously inappropriate, the regulated person must make further necessary inquiries or not distribute the product.

1.89 The first distribution obligation does not apply where the distribution conduct consists of personal advice or associated conduct. This associated conduct consists of any dealings engaged in by the personal advisor, or an associate of the advisor, for the purposes of implementing the personal advice. [Schedule 1, item 5, paragraph 994D(d) of the Corporations Act]

Obligation not to distribute where target market determination may not be appropriate

1.90 The second distribution obligation is aimed at minimising the distribution of products which may have inappropriate target market determinations. For the purposes of the obligation, a target market determination may not be appropriate if: a review trigger has occurred; or, another event or circumstance has occurred that would reasonably suggest that the determination is no longer appropriate. [Schedule 1, item 5, subsections 994C(3), 994C(4), and 994C(5) of the Corporations Act]

1.91 To minimise the risk of distributing a product in these circumstances, the amendments implement a regime with the following features:

•

Issuers are prohibited from engaging in retail product distribution conduct in relation to the product, from as soon as practicable (but no later than 10 business days) after they knew or ought to have known that the determination may be inappropriate, until they have reviewed the determination and, if necessary, made a new determination.

•

Issuers must, as soon as practicable but within 10 business days, take reasonable steps to ensure regulated persons are informed not to engage in retail product distribution conduct in relation to the product unless the issuer has reviewed the determination and, if necessary, made a new determination.

•

A regulated person must, as soon as practicable but within 10 business days, cease to engage in retail product distribution conduct when such steps have been taken by the issuer unless, after making all inquiries (if any) that are reasonable in the circumstances, the person believes on reasonable grounds the determination has been reviewed and remade (if necessary). [Schedule 1, item 5, subsections 994C(3), 994C(4), 994C(5), 994C(6) and 994C(7) of the Corporations Act]

1.92 The second distribution obligation does not apply where the distribution conduct consists of personal advice or associated conduct. This associated conduct consists of any dealings engaged in by the personal advisor, or an associate of the advisor, for the purposes of implementing the personal advice. [Schedule 1, item 5, paragraphs 994C(3)(e), 994C(4)(e), 994C(5)(e), 994C(6)(c) and 994C(7)(c) of the Corporations Act]

Obligation to take reasonable steps so that distribution is consistent with the target market determination

1.93 The third distribution obligation requires:

•

issuers to take reasonable steps aimed at making retail product distribution conduct consistent with the target market; and,

•

regulated persons to take reasonable steps to distribute a product in accordance with its target market determination. [Schedule 1, item 5, section 994E of the Corporations Act]

1.94 The first requirement focuses on the interaction between the issuer of a product and the distributors of that product. In particular, an issuer must take reasonable steps that will, or are reasonably likely to, result in retail product distribution conduct in relation to the product being consistent with the product's target market determination. It involves the issuer taking reasonable steps directed at any retail product distribution conduct engaged in by themselves or any another distributor. [Schedule 1, item 5, subsection 994E(1) of the Corporations Act]

1.95 The second requirement is directed at interactions between distributors of financial products and their clients. It provides that a regulated person must take reasonable steps that would result in, or would be reasonably likely to result in, retail product distribution conduct that they engage in being consistent with the target market determination. As noted above, retail product distribution conduct, in essence, consists of the distributor's interactions with their clients with respect to the relevant product. [Schedule 1, item 5, subsection 994E(3) of the Corporations Act]

1.96 Whether these requirements are meet is determined objectively. This means that an issuer or distributor (as the case may be) must meet the standard of behaviour expected of a reasonable person in their position that is offering the same product and is subject to the same legal obligations.

1.97 The new law uses a risk management approach to determine what satisfies the requirement of 'reasonable steps' for the purposes of the obligation. 'Reasonable steps' means steps that are, in the circumstances, reasonably able to be taken so that retail product distribution conduct in relation to the product is consistent with the product's target market determination. In making this assessment, issuers and distributors (as the case may be) are to take into account all relevant matters, including:

•

the likelihood of their conduct being inconsistent with the target market determination (that is, the likelihood of the risk);

•

the nature and degree of harm that might result from the product being issued otherwise than in accordance with the determination (that is, the consequence of the risk);

•

the availability and suitability of ways to eliminate or minimise the likelihood and the harm (that is, the extent to which the risk may practicably be mitigated); and

•

what the responsible person knows, or ought reasonably to know, about the matters referred to above (that is, the responsible person's understanding of the risk and ways to mitigate it). [Schedule 1, item 5, subsection 994E(5) of the Corporations Act]

1.98 A risk management approach ensures the obligation is scalable according to the risk associated with an inappropriate distribution of a product and the practicability of mitigating the risk. For example, where a distributor's previous conduct indicates that they may be at higher risk of engaging in conduct that is not consistent with the target market determination, issuers will need to take reasonable steps to address the risk. This could include: having systems that enable distributors to be alerted to updates of target market determinations; assisting distributors to address concerns; or, in extreme cases, ceasing to distribute the product through the distributor where doing so is possible. Other relevant factors include the complexity and risk profile of the product, and the nature of any relationship between an issuer and a distributor of a product. ^[34] However, what constitutes 'reasonable steps' will ultimately depend upon the circumstances of each case.

1.99 As noted above, the new law sets out four relevant factors that must be considered in order to establish the desired risk management approach. It is anticipated that in most instances the relevant factors that must be considered would not extend beyond those listed or, if they did, would be of a similar nature. However, where necessary an issuer is to consider any other matter that is relevant for this purpose.

1.100 As the determination of what are reasonable steps depends on the application of a risk management approach to the individual circumstances of each case, it is possible that a retail client outside of the target market will still acquire the product. To reflect this, the amendments specifically confirm that a regulated person is not taken to have failed to take reasonable merely because this occurs. [Schedule 1, item 5, subsection 994E(4) of the Corporations Act]

1.101 Likewise, the requirement for issuers to take reasonable steps is not to be mistaken for a requirement to ensure distributors comply with a target market determination. If the issuer takes reasonable steps but retail product distribution conduct of third parties is still inconsistent with the target market determination, the issuer would not breach the requirement. [Schedule 1, item 5, paragraph 994E(2) of the Corporations Act]

1.102 Each reasonable step contemplated by the new law need not itself fall within the definition of retail product distribution conduct. However, the steps would generally relate to reducing the risk of such conduct resulting in inappropriate distributions, namely retail product distribution conduct that is not consistent with the product's target market determination. For example, this would include steps aimed at reducing the risk of distributing the product to persons that are not in the product's target market.

1.103 The new regime includes amendments to clarify that conduct required to meet the above mentioned obligations does not (by itself) constitute personal advice. This clarification is required because taking reasonable steps to meet the above mentioned obligations may require a regulated person to: ask a retail client for information to determine whether or not they are in a target market (which includes making that determination); and, inform the client of the result of that determination. Either of these acts could constitute personal advice under subsection 766B(3) of the Corporations Act as they may require a regulated person to consider the client's personal circumstances or lead to an expectation that those circumstances have been considered. As such, the definition of personal advice has been amended to clarify that the acts of asking for information solely to determine whether a person is in the target market, and informing them of the result, do not, of themselves, constitute personal advice. [Schedule 1, items 3 and 4, section 761A and subsection 766B(3A) of the Corporations Act]

1.104 The third distribution obligation does not apply where distribution conduct consists of personal advice or associated conduct. This associated conduct consists of any dealings engaged in by the personal advisor, or an associate of the advisor, for the purposes of implementing the personal advice. [Schedule 1, item 5, subsection 994E(1) and 994E(3) of the Corporations Act]

1.105 In addition, the new regime includes a provision aimed at facilitating the implementation of personal advice by distributors who are not associated with the adviser. In particular, any distribution conduct necessary to implement personal advice, which relates to a particular product, is taken to amount to reasonable steps for the purposes of the above mentioned obligations. For conduct to be "necessary" to implement personal advice, the distributor must be satisfied of all relevant matters including: that the particular retail client has received personal advice in relation to a particular product; that the advice remains current; and, that the distributor's proposed conduct would be consistent with that advice as it relates to the particular product they would be distributing. [Schedule 1, item 5, subsection 994E(6) of the Corporations Act]

Obligation to collect, keep and provide distribution information

1.106 The fourth distribution obligation requires a distributor to collect and keep complete and accurate records of 'distribution information' and provide certain distribution information to the issuer. [Schedule 1, item 5, section 994A and subsections 994F(2), 994F(4) and 994F(5) of the Corporations Act]

1.107 'Distribution information' is defined as:

•

the information specified by the issuer in the target market determination in relation to specified distributors (being information which is determined on the basis that it enables the issuer to promptly identify review triggers or other events or circumstances that suggest the determination is no longer appropriate);

•

where the distributor is specified in relation to the information above - the dates on which the distributor provided the required information to the issuer;

•

the number of complaints the distributor receives to which internal or external dispute resolution procedures apply (including where the number of complaints received is zero);

•

where the distributor is not the issuer - the dates that the distributor informed the issuer of the number of complaints that they have received;

•

where the distributor is not the issuer - the dates that the distributor reported any significant dealings to the issuer; and

•

the steps taken to ensure consistency with the product's target market determination (that is, the steps to comply with the third distribution obligation).

[Schedule 1, item 5, section 994A and subsection 994F(3) of the Corporations Act]

1.108 The amendments provide for the timeframes in which distribution information must be provided to the issuer. In particular, a distributor who is required to provide information must do so as soon as practicable, and in any case within 10 business days, after the end of the reporting period specified in the target market determination. This applies whether the information relates to a reporting requirement specified in the determination or to the number of complaints the distributor has received. [Schedule 1, item 5, subsection 994F(4) and 994F(5) of the Corporations Act]

1.109 The new law clarifies that these obligations only apply to a product where it remains on offer for issue (or regulated sale) to retail clients. That is, when the financial product is no longer being issued, distribution information does not need to continue to be collected and provided. [Schedule 1, item 5, paragraph 994F(2)(b) of the Corporations Act]

1.110 These record keeping provisions support the effectiveness of the new regime. In particular, they ensure that the information necessary to review and remake a target market determination is collected and kept by distributors and provided to issuers. The provisions also support compliance with the other distribution obligations by ensuring distributors have visibility of their activities with respect to the product. To achieve these ends, the record keeping provisions apply to all regulated persons engaging in retail product distribution conduct, including those providing personal advice or engaging in conduct associated with such advice.

1.111 As noted above, the effectiveness of the record keeping provisions in the new law is supported by current provisions of the Corporations Act. In particular, it is currently an offence to destroy, conceal or falsify records required to be kept by a provision of Chapter 7 of the Act. ^[35] In addition, the Act presently provides that records required to be kept by a provision of Chapter 7 must be preserved for 5 years. ^[36] These provisions apply to the new record keeping provisions, as the provisions are inserted into Chapter 7 of the Act.

1.112 The regulations can impose requirements in relation to the new record keeping obligations. This power ensures that the information required to be collected and kept by regulated persons can be adjusted if necessary to support the effective operation of the new regime. ^[37] [Schedule 1, item 5, subsections 994F(7) and (8) of the Corporations Act]

Obligation to notify issuer of significant dealings that are not consistent with a product's target market determination

1.113 The final distribution obligation requires a regulated person to notify a product's issuer of significant dealings in a product that are not consistent with the product's target market determination. Should the person become aware of such a dealing they must notify the issuer in writing as soon as practicable, and in any case within 10 business days. [Schedule 1, item 5, subsection 994F(6) of the Corporations Act]

1.114 Consistent with existing provisions of the Corporations Act, 'significant' is not defined for the purposes of the new obligation. The meaning of significant is intended to take its ordinary meaning in the context of the new provision. Generally, this would require a regulated person to inform an issuer of dealings that would be worthy of their attention having regard to the object of the new regime and the issuer's role as the product's designer. However, ultimately whether or not a dealing is significant would be a matter to be determined in the circumstances of each case.

1.115 This notification obligation supports the effectiveness of the new regime. It ensures that an issuer is advised of a significant dealing in a product that is not consistent with the product's target market determination. By doing so, the requirement assist issuers in making timely and appropriate decisions in support of the new regime and in meeting their obligations to notify ASIC of significant dealings.

1.116 This obligation applies in relation to regulated persons that provide personal advice, or engage in conduct associated with such advice, in relation to the product. It is possible that such persons may engage in conduct in relation to a significant dealing that is not consistent with the product's target market determination. As such, it is necessary for the obligation to apply to them to ensure that all significant dealings are appropriately notified.

1.117 This distribution obligation only applies where the product is on offer for issue (or regulated sale) to retail clients. That is, when the financial product is no longer being issued, notifications are not required. [Schedule 1, item 5, paragraph 994F(5)(b) of the Corporations Act]

Promotional material must refer to target market

1.118 Currently, section 1018A of the Corporations Act requires advertising and promotional material for a financial product to refer to a product disclosure statement. The new law amends section 1018A to require such advertising and promotional material to also refer to a product's target market.

1.119 To achieve this, the new law amends two existing subsections within section 1018A so that they make appropriate reference to the new regime.

•

The first amendment is to subsection 1018A(1) of the Corporations Act, which applies where a financial product is available for acquisition by retail clients. The amendment requires an advertisement or published statement (that is reasonably likely to induce people to acquire the product) in relation to the product to describe the target market or specify where the target market determination is available.

[Schedule 1, item 6, paragraph 1018A(1)(ca) of the Corporations Act]

•

The second amendment is to subsection 1018A(2) of the Corporations Act, which applies where a product is reasonably likely to become available for acquisition by retail clients. The amendment again requires an advertisement or published statement in relation to the product to describe the target market or specify where the description is available.

[Schedule 1, item 7, paragraph 1018A(2)(ca) of the Corporations Act]

1.120 The remaining provisions of existing section 1018A are not affected by the amendments.

1.121 Existing section 1018A only applies in relation to products that require a product disclosure statement. Existing section 734 of the Corporations Act generally prohibits advertising and promoting securities. ^[38]

ASIC's powers and associated matters

1.122 The new law gives ASIC powers to support its regulatory role with respect to the new obligations. In particular, ASIC is provided with powers to:

•

request information relevant to its regulatory role;

•

issue stop orders in relation to suspected contraventions of the new regime; and

•

make exemptions and modifications to the new regime.

Information gathering power

1.123 ASIC will have information gathering powers to obtain information concerning:

•

distribution information that a regulated person possesses or has access to (see paragraph 1.107); and

•

records the issuer must keep under the new regime (see paragraph 1.76). [Schedule 1, item 5, subsections 994H(1) and 994H(2) of the Corporations Act]

1.124 The new law sets out the process by which ASIC must request information and how it ought to be provided. Specifically:

•

ASIC's request for the information or records must be in writing; and

•

the response to a request must be in writing and given to ASIC by the date specified in the request, or if no date is specified, within 10 business days after the day the person is notified of the request. [Schedule 1, item 3, section 994H(3) of the Corporations Act]

Stop orders power

1.125 The new law gives ASIC the power to make a stop order with respect to certain contraventions of the new regime. The relevant contraventions are those relating to:

•

a failure to make, review, or make public a target market determination;

•

engaging in retail product distribution conduct in relation to a product without a determination or with a determination that is no longer appropriate; and

•

failing to take reasonable steps so that retail product distribution conduct is consistent with the target market determination. [Schedule 1, item 5, subsection 994J(1) of the Corporations Act]

1.126 The power to make stop orders with respect to these contraventions reflects their key role in promoting the provision of suitable financial products to consumers. The intent of stop orders in relation to the new regime is to protect retail clients from breaches of the design and distribution regime. As such, any conduct specified in a stop order must be conduct in relation to a retail client with respect to a financial product. In addition, a stop order cannot operate in relation to personal advice or associated conduct and a copy of any order must be served on the issuer of the product to which the order relates. [Schedule 1, item 5, subsections 994J(2) and 994J(7) of the Corporations Act]

1.127 There are two principal obligations associated with a stop order. These are:

•

the person on whom the order is served, or a person who is aware of the order, must not engage in conduct contrary to the order; and,

•

the person on whom the order is served must take reasonable steps to ensure other people who engage in the conduct to which the order applies are aware of the order. [Schedule 1, item 5, subsections 994J(2) and 994J(7) of the Corporations Act]

1.128 Before making a stop order ASIC must hold a hearing and take submissions on whether it should be made. However, if the delay from that process would be prejudicial to the public interest an interim 21 day order can be made without consultation. An interim order can also be made at any time during the hearing, in which case it will last until ASIC makes a final order or the interim order is revoked. [Schedule 1, item 5, subsections 994J(3), 994J(4) and 994J(5) of the Corporations Act]

1.129 ASIC currently has the power to make a stop order in relation to contraventions of key provisions of the disclosure regime for financial products. ^[39] The amendments are based on these existing provisions. The principles applicable to ASIC's existing stop order powers with respect to the disclosure regime apply equally in the context of the stop order power contained in the Bill.

1.130 The amendments provide that a stop order is not a legislative instrument. This provision is included only to inform readers of the character of a stop order. A stop order is non-legislative in character as it must relate to a suspected contravention of the law and therefore applies the law in a particular case. ^[40] [Schedule 1, item 3, subsection 994J(2) of the Corporations Act]

Exemption and modification powers

1.131 The new law gives ASIC the power to make exemptions and modifications to the new regime. In particular, ASIC may:

•

exempt a person or class of persons from all or specified provisions of the new regime;

•

exempt a financial product or a class of financial products from all or specified provisions of the new regime; or

•

declare that the new regime applies in relation to a person or financial product (or class of person or products) as if specified provisions were omitted, modified or varied as specified in the declaration.

[Schedule 1, item 5, sections 994K and 994L of the Corporations Act]

1.132 ASIC presently has exemption and modification powers concerning the disclosure regime for financial products. ^[41] The amendments, in effect, replicate these existing provisions and apply them as appropriate to the new design and distribution regime. The principles applicable to ASIC's existing exemption and modification powers with respect to the disclosure regime also apply in the context of the present amendments.

1.133 The exemption and modification powers support the effective operation of the new regime. In particular, they provide ASIC with the flexibility to make exemptions and modification to the regime should a need arise in future. For example, ASIC would be able to tailor the operation of the regime so as to avoid any unintended consequences that may arise with respect to a particular person or product.

1.134 The regulations may also provide for exemptions to the new regime. Existing section 1368 provides that the regulations may make exemptions to provisions in Chapter 6D or 7. As this new regime is part of Chapter 7, the power in section 1368 applies to it.

Consequences of breaching the new provisions

1.135 The consequences of breaching the new provisions fall into two main categories. These are:

•

liability to the state through civil penalty proceedings or criminal prosecution; and

•

liability to persons suffering loss or damage through civil action.

Civil and criminal penalties

1.136 A contravention of every obligation in the new regime is both a civil penalty provision and an offence. This allows the regulator or prosecutor (as the case may be) to take a proportional approach to the enforcement of the new regime.

1.137 The maximum penalties applicable to each obligation in the Bill are detailed in the following tables. The new law gives effect to the penalties by making the necessary amendments to existing section 1317E of the Corporations Act (in relation to civil penalties) and Schedule 3 of the Corporations Act (in relation to criminal penalties). [Schedule 1, items 8 and 9, subsection 1317E(1) and Schedule 3 of the Corporations Act]

Table 1.1 Penalties concerning obligations

[Schedule 1, items 5, 8 and 9, sections 994B, 994C, 994D, 994E, 994F, 994G, 994H, and 99J, table items 40A to 40AN in subsection 1317(1), and table items 290CAA to 290CAJ in the table to Schedule 3 of the Corporations Act]

1.138 The penalties applicable to each obligation are broadly consistent with current penalties applicable to comparable provisions in the Corporations Act. The principles set out in the Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers ^[42] were also considered in determining the applicable penalties.

Civil liability

1.139 A person who suffers loss or damage because of a relevant contravention of the new regime may recover that loss or damage by civil action. The relevant contraventions relate to:

•

failing to review the target market as required and associated obligations;

•

failing to make a target market determination or distributing a product without a determination; and,

•

failing to take reasonable steps to comply with a target market determination.

More detail in relation to each of these situations is below.

1.140 The first situation arises if any of the following contraventions take place and a person suffers loss because of the contravention:

•

the issuer fails to review the target market determination during a review period;

•

the issuer engages in retail product distribution conduct after failing to review the determination in response to a review trigger, or other events or circumstances that indicate the target market determination may no longer be appropriate;

•

the issuer fails to take reasonable steps to notify regulated persons not to distribute when a review trigger, or other relevant event or circumstance has occurred; or

•

a regulated person distributes a product after being notified by issuers not to do so.

[Schedule 1, item 5, subsections 994M(1)(a) and 994M(1)(b) of the Corporations Act]

1.141 However, it should be noted that civil liability does not arise where the defences to these contraventions are available. In particular:

•

in relation to the issuer, this is where the review has already been conducted and the target market determination has been re-made (if necessary); and

•

in relation to the regulated person, this is where all reasonable inquiries have been made and the regulated person believed on reasonable grounds that the determination had been reviewed and re-made (if necessary).

1.142 The second situation arises where a target market determination is not made for a product which requires such a determination or where a product is distributed without a target market determination. In particular, the amendments provide a person with a cause of action if:

•

an issuer fails to make a target market determination as required by the regime or a regulated person engages in retail product distribution conduct in relation to a product that does not have a target market determination; and

•

the person suffers loss or damage because of that conduct.

[Schedule 1, item 5, subsection 994M(1)(a) and 994M(1)(b) of the Corporations Act]

1.143 Again, this cause of action does not arise when a defence to the contravention is available. In particular, the cause of action would not arise if a regulated person (except the issuer) made all inquiries that were reasonable in the circumstances and after doing so, believed on reasonable grounds that the target market determination had been validly made by the issuer. This ensures that a distributor is not liable to civil action in circumstances where any wrongdoing is ultimately attributable to the issuer.

1.144 The third situation arises where a person suffers loss or damage because of a failure to take reasonable steps so that distribution is consistent with the target market determination. In particular, the amendments provide a cause of action if any of the following contraventions take place and the person suffers loss because of the contravention:

•

an issuer fails to take reasonable steps that would, or would reasonably be likely to result in retail product distribution conduct being consistent with the target market determination;

•

a regulated person fails to take reasonable steps that would have resulted in, or would reasonably likely have resulted in retail product distribution conduct being consistent with the target market determination.

[Schedule 1, item 5, subsection 994M(1)(a) and 994M(1)(b) of the Corporations Act]

1.145 The new cause of action does not affect any liability that a person has under any other law. In addition, the causes of actions arise regardless as to whether any person has been convicted of an offence or ordered to pay a civil penalty with respect to the relevant contravention. [Schedule 1, item 3, paragraphs 993DM(1)(c), (d) and (e), and subsection 994M(3)]

1.146 The limitation period applicable to the cause of action is 6 years. The limitation period commences on the day on which the cause of action arose, meaning that any action must be commenced within 6 years of that date. [Schedule 1, item 5, subsection 994M(2)]

1.147 The court dealing with the new cause of action is intended to be able to make a variety of orders. To ensure the court has appropriate powers, the amendments provide that the court may, in addition to awarding loss or damage:

•

make an order declaring that a contract entered into by the person who suffered loss or damage is void; and

•

if it makes such an order - make such other orders as it thinks are necessary or desirable because of that order. [Schedule 1, item 5, subsection 994N(1) of the Corporations Act]

1.148 There are a variety of other orders that a court may make where it has declared a contract void. These include, for example: an order for the return of money paid by a person and an order for payment of an amount of interest specified in, or calculated in accordance with, the order. [Schedule 1, item 5, subsection 994N(2) of the Corporations Act]

1.149 The new regime also provides ASIC with standing to seek orders to redress loss or damage for affected consumers who are non-parties to legal proceedings that relate to a contravention of the DDO regime for which a person may bring a private action. The new law specifies the kind of orders that may be made by the court to redress loss or damage suffered by non-party consumers. The new provisions are consistent with existing provisions of the ASIC Act that apply in relation to certain contraventions of that Act. [Schedule 1, item 5, sections 994P and 994Q of the Corporations Act]

Consequential amendments

1.150 The new law makes a consequential amendment to existing section 760B of the Corporations Act. The amendment updates the table in that section so that it refers to the new law. This amendment ensures that the outline to Chapter 7 of the Corporations Act, which is contained in section 760B, remains current. [Schedule 1, item 2, section 760B of the Corporations Act]

Application and transitional provisions

1.151 The new design and distribution regime applies 24 months after this Bill receives the Royal Assent. [Section 2 of the Bill]