Senate

Revised Explanatory Memorandum

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

Chapter 2 Product intervention power

Outline of chapter

2.1 Schedule 2 to the Bill amends the Corporations Act and the Credit Act to introduce a product intervention power for ASIC to prevent or respond to significant consumer detriment. It sets out:

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the new power and when it can be exercised;

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the range of products which can be subject to the power;

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ASIC's obligations when exercising the power; and

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the consequences for failing to comply with an ASIC order.

Context of amendments

2.2 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.

2.3 ASIC has powers under certain parts of the Corporations Act to impose conditions and take actions to rectify consumer detriment after a breach or suspected breach of the law. However, these powers provide ASIC with limited scope to regulate proactively.

2.4 ASIC can only intervene in certain situations where there is a suspected contravention of the law. For example, ASIC can stop the issuance of products where the disclosure documents are defective. This limits ASIC's ability to intervene in the distribution of products where there is no defective disclosure.

2.5 The FSI considered the scope of ASIC's powers in the context of past situations where consumers had suffered significant consumer detriment and ASIC had exhausted its regulatory toolkit. ^[43] The FSI found that early intervention by ASIC could be more effective in reducing harm to consumers compared with waiting for a breach to occur. It recommended providing ASIC with a proactive intervention power that would enhance the regulatory toolkit available where there is risk of significant consumer detriment. ^[44]

2.6 The Government accepted the FSI recommendation to introduce an intervention power on 20 October 2015. ^[45] On 13 December 2016, the Minister for Revenue and Financial Services released a proposals paper on the implementation of the obligations. ^[46]

2.7 The intervention power will allow ASIC to regulate, or if necessary, ban potentially harmful financial and credit products where there is a risk of significant consumer detriment. The power is intended to enable ASIC to take action before harm, or further harm, is done to consumers.

2.8 The Department of the Treasury has considered the compliance costs associated with implementing the product intervention power. The department's analysis is in Chapter 3.

Summary of new law

2.9 Schedule 2 to the Bill amends the Corporations Act and the Credit Act to introduce the intervention power. The intervention power allows ASIC to make a range of orders prohibiting specified conduct in relation to products regulated under those Acts and the ASIC Act. The intervention power allows ASIC to proactively reduce the risk of consumers suffering significant detriment from financial and credit products.

2.10 To ensure appropriate accountability, ASIC must satisfy consultation and notification obligations before an intervention order is made. Affected parties will be given the opportunity to make submissions to ASIC before an intervention is made, and all interventions will be made public.

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

2.12 ASIC may only intervene in relation to products that are made available for acquisition after the commencement of the new power. In addition, an order cannot apply to a product that has already been acquired or where a contract for the acquisition of the product has already been entered into. This ensures that the new power cannot interfere with existing arrangements between consumers and providers.

Comparison of key features of new law and current law

Detailed explanation of new law

2.13 Schedule 2 to the Bill amends the Corporations Act and the Credit Act to introduce the intervention power.

2.14 The object of the intervention power is to give ASIC a proactive power to reduce the risk of significant detriment to consumers resulting from financial and credit products. [Schedule 2, items 7 and 13, section 1023A of the Corporations Act and section 301A of the Credit Act]

2.15 To do this the Bill inserts a new part into both the Corporations Act and Credit Act that contains the new intervention power. The new parts detail:

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the products which can be subject to the power;

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when the power can be used;

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the content of the power, including the types of interventions that can be made and the process for making them; and

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the consequences for failing to comply with an intervention.

What products are subject to the intervention power?

2.16 The intervention power applies to products regulated under the ASIC Act, Corporations Act, and Credit Act.

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In the case of ASIC Act and Corporations Act financial products, the intervention power generally only applies to financial products that are, or are likely to be, available for acquisition by retail clients by way of issue. However, the power also applies to such products in certain anti-avoidance sale situations.

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In the case of the Credit Act, the intervention power applies to all products that may be provided by a person in the course of engaging in a credit activity or proposed credit activity. Such products consist of credit contracts, mortgages and guarantees in relation to those contracts, and consumer leases.

[Schedule 2, items 7 and 13, section 1023B and paragraphs 1023D(1)(a) and 1023D(3)(a) of the Corporations Act, and paragraphs 301D(1)(a) and 301D(3)(a) of the Credit Act]

Financial products

2.17 There are two main limitations on the types of financial products that can be subject to the intervention power under the Corporations Act (noting that the regime under the Corporations Act has an extended operation in relation to all ASIC Act financial products within the meaning of Division 2 of Part 2 of the ASIC Act). First, the power generally only applies in an 'issue situation'. Second, the power only applies where a product may be made available to 'retail clients'.

2.18 The intervention power generally only applies to financial products that are, or are likely to be, available by way of issue. What constitutes a financial product is defined in existing Division 2 of Part 2 of the ASIC Act. 'Financial product' is a broad term that covers a range of products that meet the investment and risk management needs of investors. Examples include securities, insurance products, derivatives, superannuation products and credit products (including credit products not covered by the Credit Act). [Schedule 2, item 7, section 1023B and paragraphs 1023D(1)(a) and 1023D(3)(a) of the Corporations Act]

2.19 The intervention power cannot generally apply 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. ^[47] However, existing sections 707 and 1012C of the Corporations Act detail certain sale situations which could potentially be used to avoid the intervention power. ^[48] These situations include:

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off-market sales where the seller controls the issuer;

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sales amounting to an indirect issue; and

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indirect off-market sales where the seller controls the issuer.

2.20 To prevent these and similar sale situations being used to avoid the intervention power, the new law enables the power to be used in the sale situations ('regulated sales') detailed in sections 707 and 1012C of the Corporations Act. [Schedule 2, item 7, section 1023B and paragraphs 1023D(1)(a) and 1023D(3)(a) of the Corporations Act]

2.21 The intervention power only applies where the relevant product may be offered to retail clients. What constitutes a retail client is defined in existing sections 761G and 761GA of the Corporations Act. The precise definition depends on a range of circumstances, but roughly captures those persons that may be considered ordinary consumers of financial products, as opposed to wholesale clients. The fact the intervention power only operates in relation to retail clients reflects its objective of enhancing consumer protections under the Act.

2.22 The intervention power can be used regardless as to whether or not the financial product requires disclosure under Chapter 6D or Part 7.9 of the Corporations Act. This ensures that the power is not unduly limited in its operation.

2.23 The regulations may exclude financial products from the operation of the new intervention power. This may be appropriate, for example, where the new power may have unintended consequences in the context of a particular product. This flexibility to exclude financial products form the new regime is therefore necessary to future-proof the new power. [Schedule 2, item 7, section 1023B and subsection 1023C(3) of the Corporations Act]

2.24 To support the efficient operation of the new regimes, and financial market regulation more generally, the Bill also includes an enhanced ability to prescribe financial products for the purposes of Chapter 7 (Financial services and markets) of the Corporations Act. In particular, the Bill will enable the regulations to declare anything to be, or to not be, a financial product for specified provisions of Chapter 7. Currently, the regulations may only declare something to be, or not to be, a financial product for all Chapter 7 purposes. A provision is also inserted into existing section 765A to clarify that regulations made under that section have precedent (to the extent of any inconsistency) over an inconsistent ASIC declarations. [Schedule 2, items 4 and 6, subsections 764A(3), 765A(3) and 765A(4) of the Corporations Act]

Credit products

2.25 The intervention power also applies to products that may be provided by a person who engages in a credit activity under the Credit Act. Section 6 of the Credit Act defines 'credit activity' to include a broad range of activities in relation to credit products. [Schedule 2, item 13, paragraphs 301D(1)(a) and 301D(3)(a) of the Credit Act]

2.26 Credit products are credit contracts, consumer leases, mortgages, and guarantees. What constitutes these products is defined in the National Credit Code (the Code) at Schedule 1 of the Credit Act as follows:

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A 'credit contract' is a contract that provides credit where:

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the debtor is a consumer (that is, a natural person or strata corporation);

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the credit is intended to be used for: personal, domestic, or household purposes; or, to purchase, renovate or improve residential property for investment purposes or to refinance such credit;

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a charge is or may be made for providing the credit; and

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the credit is provided in the course of a business. ^[49]

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A 'consumer lease' is a contract for the hire of goods by a consumer under which:

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the consumer does not have a right or obligation to purchase the goods;

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the goods are hired for a personal, domestic or household purpose;

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the hire charge exceeds the price of the goods; and

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the lessor hires the goods in the course of a business. ^[50]

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A mortgage or guarantee is regulated where it is granted by a consumer and secures or guarantees obligations under a credit contract. ^[51]

2.27 The new intervention power only applies prospectively. An intervention cannot apply in relation to any product that has already been entered into. This ensures that while the new power can operate with respect to products yet to be acquired, it cannot operate so as to vary any existing contractual obligations or arrangements between a consumer and a credit provider, lessor, mortgagee or beneficiary of a guarantee. Likewise, the new power cannot affect any assignment of an existing right under a credit product. [Schedule 2, item 7 and 13, subsection 1023C(1) of the Corporations Act and subsection 301C(1) of the Credit Act]

2.28 The term 'product' is used to describe any product that may be subject to the new intervention power.

When can the intervention power be used?

2.29 The new intervention power can be used where ASIC is satisfied that a product or class of products has resulted, or is likely to result, in significant detriment to relevant persons. Relevant persons are retail clients for the purposes of the new power under the Corporation Act and consumers proposing to acquire credit products for the purposes of the new power under the Credit Act. These persons will be collectively referred to as consumers unless a contrary intention is indicated. [Schedule 2, items 7 and 13, subsections 1023D(1) and 1023D(3) of the Corporations Act and subsections 301D(1) and 301D(3) of the Credit Act]

2.30 Consistent with existing provisions of the Corporations Act, 'significant' is not defined for the purposes of the new power. The meaning of significant is intended to take its ordinary meaning in the context of the new provision. Generally, this would require the detriment to be sufficiently great to justify an intervention, having regard to the circumstances of the case and the object of the intervention power.

2.31 The new law provides guidance about matters that must be considered in determining whether a detriment for the purposes of the new power is significant. These factors are:

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the nature and extent of the detriment, including any actual or potential financial loss to consumers;

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the impact that the detriment has had, or will or is likely to have, on consumers; and

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any other matter prescribed by the regulations.

[Schedule 2, items 7 and 13, section 1023E of the Corporations Act and section 301E) of the Credit Act]

2.32 The factors are non-exclusive. ASIC can consider any other relevant factor when determining the significance of the relevant detriment. ASIC can take into account a range of objective and subjective factors in determining whether a loss is significant. For example, objective factors could include the number of consumers affected and the total amount of the detriment. Subjective factors could include the impact of the detriment on the consumers affected by it. [Schedule 2, items 7 and 13, subsection 1023E(2) of the Corporations Act and subsection 301E(2) of the Credit Act]

2.33 The new law does not define a detriment for the purposes of the new power. The meaning of detriment is intended to take its ordinary meaning in the context of the new provision. However, it is intended to cover a broad range of harm or damage that may flow from a product. The harm or damage may arise from any number of sources associated with the product, including the product's features, defective disclosure, poor design, or inappropriate distribution.

2.34 A product's compliance with existing provisions of the law may be relevant to whether it is likely to cause significant consumer detriment. However, a product may cause such detriment even if it complies with all applicable laws. In particular, a product may result in significant detriment to consumers even if a person has complied with all applicable disclosure requirements, and with the person's design and distribution obligations, in relation to the product. [Schedule 2, items 7 and 7, subsection 1023E(3) of the Corporations Act and subsection 301E(3) of the Credit Act]

What is the content of the new intervention power and how is it exercised?

2.35 The new power allows ASIC to make an intervention order that may last for up to 18 months, unless it is extended by ASIC with approval from the Minister.

Intervention orders

2.36 The new power allows ASIC to make intervention orders. Under an intervention order, ASIC can order, in relation to a product or class of product, that conduct must not be engaged in in relation to a retail client, either entirely or except in accordance with any conditions in specified in the order. [Schedule 2, items 7 and 13, subsections 1023D(1) and 1023D(3) of the Corporations Act and subsections 301D(1) and 301D(3) of the Credit Act]

2.37 An intervention order may generally operate in relation to any person or class of persons. However, it cannot operate in relation to a person in their capacity as a retail client. In addition, the regulations may provide classes of persons in relation to which an intervention order cannot be made. [Schedule 2, items 7 and 13, subsections 1023C(2) and 1023C(3) of the Corporations Act and subsections 301C(2) and 301C(3) of the Credit Act]

2.38 The range of orders that ASIC can make under an intervention order is extensive. Some examples of the breadth of possible orders include:

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banning a person from issuing a product or class of product to consumers;

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directing that a particular product or class of product only be offered by way of issue to particular classes of consumers or in particular circumstances; and

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directing that a product or class of product not be distributed unless accompanied by an appropriate warning or label.

2.39 However, the new law provides some limitations on the matters that may be subject to an intervention order. These limitations provide that an intervention order cannot:

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require a person satisfy a standard of training, or meet a professional standard, other than a standard prescribed for the person by or under this Act;

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require a person who is not required to hold an Australian financial services licence to join an external dispute resolution scheme; or

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impose requirements in relation to a person's remuneration, other than so much of the remuneration as is conditional on the achievement of objectives directly related to the financial product. [Schedule 2, items 7 and 13, subsection 1023D(4) of the Corporations Act and subsection 301D(4) of the Credit Act]

2.40 An intervention order with respect to the above matters would not be appropriate. In addition, the new power should not generally be able to affect remuneration arrangements between parties. However, an exception is made where the remuneration arrangement is contingent upon the achievement of objectives directly related to the financial product. In such situations, the arrangement could promote adverse consumer outcomes.

2.41 The conduct covered by an intervention order must be limited to conduct in relation to a consumer. For example, an intervention order cannot limit the offering or distribution of products to wholesale clients. This limitation flows from the purpose of the new regime, which is directed at reducing the risk of significant detriment to consumers. For similar reasons, it is envisaged that an intervention order would generally be directed at addressing the significant consumer detriment identified by ASIC. [Schedule 2, items 7 and 13, subsection 1023D(5) of the Corporations Act and subsection 301D(5) of the Credit Act]

2.42 ASIC and the Minister may delegate their functions and powers under the regime in line with existing delegations in relation to comparable matters. ASIC may delegate its functions and power with respect to intervention orders to an ASIC commissioner, or a senior executive staff member of ASIC. The Minister must not delegate the Minister's powers to a person other than ASIC and ASIC must not further delegate any such powers that have been delegated to it. [Schedule 2, items 15 to 17, subsection 337(1A) of the Credit Act and subsections 102(2C) and 102(2D) of the Australian Securities and Investments Commission Act 2001]

Duration of intervention order

2.43 An intervention order made by ASIC may continue for up to 18 months (the prescribed period) unless the period is extended by ASIC with the approval of the Minister, following a report to the Minister from ASIC on whether the extension should be made. In addition, if a court makes an order staying or otherwise affecting the operation or enforcement of an intervention order, the period of the court's order is not included towards the prescribed period. [Schedule 2, items 7and 13, subsection 1023G(2) of the Corporations Act and subsection 301B of the Credit Act]

2.44 The regulations may vary the prescribed period, but only so as to shorten the period. The regulations cannot lengthen the prescribed period beyond 18 months. An intervention order can only be lengthened beyond 18 months if ASIC extends it by declaration for a set period of time or permanently (subject to any later revocation) after receiving approval from the Minister to do so. [Schedule 2, items 7 and 13, section 1023H of the Corporations Act and section 301H of the Credit Act]

2.45 There are strict rules relating to remaking an intervention order. In particular, if an order ceases to be in force or is revoked, ASIC may not remake the order, or make an order in substantially the same terms unless: the circumstances have materially changed from those when the order was made; or, the Minister approves the remaking of the order. [Schedule 2, items 7 and 13, section 1023M of the Corporations Act and section 301M of the Credit Act]

2.46 An intervention order can only be extended by a declaration made in the above mentioned circumstances. While more than one declaration extending the order can be made, each extension requires the approval of the Minister after considering a report on the mater from ASIC. All such declarations must be published on ASIC's website and have precedent over any previously specified timeframe in relation to the duration of the order. [Schedule 2, items 7 and 13, subsections 1023H(1), 1023H(1), 1023H(3), 1023H(4), 1023J(4) and 1023L(4) of the Corporations Act and section 301H(1), 301H(2), 301H(3), 301H(4), 301J(4) and 301L(4) of the Credit Act]

2.47 It should be noted that any declarations must be published alongside the intervention order. This requirement assists those affected by an order by ensuring that documents relevant to the order are located together or near each other on ASIC's website. The same applies to other documents associated with an order, in particular the public notice in relation to the order and any amendments to the order.

Procedural requirements

2.48 ASIC must comply with two key procedural requirements prior to making an intervention order. These procedural requirements relate to consultation and the issuance of a public notice with respect to the intervention.

Consultation

2.49 The first procedural requirement that ASIC must meet prior to making an intervention order relates to consultation. There are three consultation requirements that may be applicable to the making of an intervention order.

2.50 The first requirement is for ASIC to consult with people or entities that are likely to be affected by the order. This consultation requirement is intended to assist with the operation of the new regime. In particular, it would assist ASIC in framing an appropriate intervention (if any). It may also provide an opportunity for affected parties to work with ASIC to resolve ASIC's concerns, potentially without the need for the intervention order. [Schedule 2, items 7 and 13, subsection 1023F(1) of the Corporations Act and subsection 301F(1) of the Credit Act]

2.51 The requirement is for ASIC to consult with persons likely to be affected by the proposed order. If ASIC undertakes a targeted consultation process it must identify these parties and invite them to participate in the consultation process. However, ASIC is taken to have complied with the requirement to consult affected parties if it undertakes a public consultation process. Such a process requires ASIC: to make a proposed order, or a description of such an order, available on its website; and, to invite public comment on the proposed order. [Schedule 2, items 7 and 13, subsection 1023F(2) of the Corporations Act and subsection 301F(2) of the Credit Act]

2.52 The second consultation requirement is for ASIC to consult with APRA prior to making an intervention order in which APRA may have an interest. In particular, ASIC must consult with APRA on a proposed product intervention order that would apply to a body regulated by APRA. [Schedule 2, items 7 and 13, paragraph 1023F(1)(b) of the Corporations Act and paragraph 301F(1)(b) of the Credit Act]

2.53 Finally, ASIC must also comply with any further consultation requirements prescribed by the regulations. [Schedule 2, items 7 and 13, paragraph 1023F(1)(c) of the Corporations Act and paragraph 301F(1)(c) of the Credit Act]

2.54 This consultation process is intended to be mandatory. However, a failure to comply with the requirements does not invalidate an intervention order. This ensures that an otherwise valid intervention order is effective despite any defect in the relevant consultation process. However, ASIC must include in its annual report details of any instances where it has failed to meet the requirements. [Schedule 2, items 7, 13, and 18, subsection 1023F(3) of the Corporations Act, subsection 301F(3) of the Credit Act and subsection 136(1)(ca) of the Australian Securities and Investments Commission Act 2001]

2.55 The law clarifies that section 17 of the Legislation Act 2003 does not apply to the making of an intervention order. Section 17 sets out the general consultation requirements for legislative instruments. That provision applies to all legislation instruments made under the new regime except for the making of an intervention order. The exception of section 17 in the case of making an order reflects specific needs for consultation when making an intervention order, for example, to consult with APRA where relevant. [Schedule 2, items 7 and 13, subsection 1023F(4) of the Corporations Act and subsection 301F(4) of the Credit Act]

Public notice of intervention orders

2.56 The second procedural requirement that ASIC must meet prior to making an intervention involves notification. Orders must be published and a public notice issued in relation to the intervention. The order and notice must be published on ASIC's website, and the notice must contain certain information. In particular, the notice must:

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describe the significant detriment to consumers in relation to which the intervention is made;

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if the order takes effect later than the day it is published, specify the date the order is to take effect;

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describe the consultation ASIC has undertaken on the order;

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set out why the order is an appropriate way of reducing the significant detriment.

[Schedule 2, items 7 and 13, subsections 1023L(2) and 1023L(3) of the Corporations Act and subsections 301L(2) and 301L(3) of the Credit Act]

2.57 ASIC must make a similar public notice if an intervention order is amended. Such a notice must detail the amendment, when the amendment takes effect, the consultation undertaken with respect to the amendment and why the amendment is appropriate. [Schedule 2, items 7 and 13, subsections 1023L(5) and 1023L(6) of the Corporations Act and subsections 301L(5) and 301L(6) of the Credit Act]

2.58 In the case of a revocation of an intervention order, ASIC need only publish the notice of the revocation on its website. [Schedule 2, items 7 and 13, subsection 1023L(7) of the Corporations Act and subsection 301L(7) of the Credit Act]

2.59 For intervention orders and amendments to orders that are not legislative instruments, ASIC must also serve a copy of the order or amendment on any person to whom ASIC considers the order applies. This ensures that individuals who are directly affected by orders in relation to individual products know that they must comply with such orders. [Schedule 2, items 7 and 13, subsections 1023L(1) and 1023L(4) of the Corporations Act and subsections 301L(1) and 301L(4) of the Credit Act]

Commencement of intervention orders

2.60 The commencement date of an intervention order depends on whether it is a legislative instrument or not. In particular:

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An intervention order is a legislative instrument where it relates to a class of product or class of persons. In such a case, the order commences the day after the legislative instrument is registered.

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An intervention order is not a legislative instrument if it relates to a particular person or a particular product. In such a case, the order applies from the date it is published or from the date specified in the public notice related to the intervention.

[Schedule 2, items 7 and 13, subsection 1023G(1) of the Corporations Act and 301G(1) of the Credit Act]

Amendment and revocation

2.61 ASIC can revoke or amend an intervention order that has not been extended at any time. Where an intervention order has been extended, ASIC can only revoke or amend the order with the Minister's approval, given after considering a report from ASIC. However, an intervention order can never be amended so as to extend the duration of its operation. The duration of an intervention order can only be extended by the declaration process that has already been outlined above. [Schedule 2, items 7 and 13, sections 1023J and 1023K of the Corporations Act and sections 301J and 301K of the Credit Act]

2.62 The character of an intervention influences the process relevant to amending or revoking the order.

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Orders that are legislative instruments may only be amended or revoked by legislative instrument. Such amendments commence the day after the legislative instrument is registered (unless another date is specified in the instrument) and are subjects to the requirements of the Legislation Act 2003, including disallowance.

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Orders that are not legislative instruments must be amended or revoked in writing. Such amendments commence from the day the amendment is published on the ASIC website (unless another day is specified in the public notice). [Schedule 2, items 7 and 13, subsections 1023G(1), 1023J(5) and (6) and 1023K(4) of the Corporations Act and subsections 301G(1), 301J(5) and 301K(4) of the Credit Act]

2.63 All amendments to, and revocations of, interventions orders must be published on ASIC's website. In the case of an amendment, ASIC must also publish on its website a notice that: sets out why the amendment is appropriate; and describes the consultation that ASIC undertook in relation to the amendment. In the case of a revocation, ASIC need only publish a notice of the revocation on its website. [Schedule 2, items 7 and 13, subsections 1023L(6), 1023L(7) and 1023L(8) the Corporations Act and subsections 301L(6), 301L(7) and 301L(8) of the Credit Act]

Obligations associated with intervention orders

2.64 There are three obligations associated with intervention orders.

2.65 The first (and principal) obligation is for a person not to engage in conduct that is contrary to the order. This obligation applies in relation to all intervention orders. [Schedule 2, items 7 and 13, subsection 1023P(1) of the Corporations Act and subsections 301P(1) of the Credit Act]

2.66 The second obligation only arises if a person is served with an intervention order. The obligation requires the person to take reasonable steps to ensure that other persons who engage in conduct to which the order applies are aware of the order. A similar obligation applies in relation to stop orders made under existing provisions of the Corporations Act. ^[52] [Schedule 2, items 7 and 13, subsection 1023P(4) of the Corporations Act and subsections 301P(6) and 301P(7) of the Credit Act]

2.67 Service is not necessary where an intervention order is made by legislative instrument. In the case of an instrument of a legislative character, a person does not need to be notified of the instrument in order to be obligated to comply with the instrument. [Schedule 2, items 7 and 13, subsection 1023P(1) of the Corporations Act and subsection 301P(1) of the Credit Act]

2.68 The third (and final) obligation enables ASIC to require a person to notify their customers of an intervention order in certain circumstances. These circumstances are where: an intervention order has been made in relation to a product; and, the person has dealt in, or provided financial advice in relation to, the product with respect to consumers. In these circumstances, ASIC may require the person to notify those customers of the terms of the intervention order and any other matters that may be prescribed in the regulations. [Schedule 2, items 7 and 13, subsection 1023N(1) and subsection 1023P(2) of the Corporations Act and section 301N and subsections 301P(3) and (4) of the Credit Act]

2.69 The notice ASIC provides to the person may specify the way in which the person is to notify their customers. If the intervention order is a legislative instrument, the notice must also be a legislative instrument. If the notice is not a legislative instrument, a person does not need comply with the notice if they are not aware, and could not reasonably be aware, of the notice. [Schedule 2, items 7 and 13, paragraph 1023N1(b) of the Corporations Act and paragraph 301N(1)(b) of the Credit Act]

Review of intervention orders

2.70 Section 1317 of the Corporations Act provides a general right to apply to the Administrative Appeals Tribunal for merit review of a decision made under the Act by ASIC and certain other bodies. Section 327 of the Credit Act provides an equivalent right of review for decisions made by ASIC under that Act. These rights of review apply to all decisions made by ASIC under the new product intervention order regime, except those made by legislative instrument. Decisions made by legislative instrument are subject to the processes applicable to such instruments, including parliamentary oversight via the disallowance process, rather than merits review. ^[53] [Schedule 2, items 10 and 14, paragraph 1317(gdl) of the Corporations Act and subparagraphs 327(1)(d)(iii) to 327(1)(d)(v) of the Credit Act]

What are the consequences of contravening the new regime?

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

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

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liability to persons suffering loss or damage through civil action.

Civil and criminal penalties

2.72 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.

The maximum penalties applicable to each obligation in the Bill are detailed in the following table.

Table 2.1 Penalties concerning obligations

2.73 The penalties applicable to each obligation are broadly consistent with current penalties applicable to comparable provisions in the Corporations Act. The criminal penalties applicable to breaching an intervention order are, however, greater than those applicable to breaching a stop order made under an existing provision of the Corporations Act. The difference reflects the broader range of orders that can be made under the new power and that an intervention order can only be made where consumers may suffer significant detriment. The principles set out in the Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers ^[54] were also considered in determining the applicable penalties.

2.74 The way the law gives effect to the penalties varies between the Corporations Act and the Credit Act. In the case of the Corporations Act, the penalties are given effect to by making the necessary amendments to existing subsection 1317E of the Corporations Act (in relation to civil penalties) and Schedule 3 of the Corporations Act (in relation to criminal penalties). In the case of the Credit Act, the penalties are specified in the provisions that create the offence. [Schedule 2, items 7, 11, 12 13, sections 1023N and 1023P, table items 40P to 40R in subsection 1317E(1) and table item 309AG in Schedule 3 of the Corporations Act, and sections 301N and 301P of the Credit Act]

Civil liability

2.75 A person who suffers loss or damage because of a contravention of an intervention order may recover that loss or damage by civil action. In particular, the amendments provide a consumer with a cause of action if:

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a person is required to comply with an intervention order and contravenes the order; and

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the consumer suffers loss or damage because of the other person's contravention of the order. [Schedule 2, item 7, subsection 1023Q(1)]

2.76 The new cause of action does not affect any liability that the person who contravenes the intervention order has under any other law. In addition, the cause of action arises regardless as to whether or not the person who contravenes the order has been convicted of an offence or ordered to pay a civil penalty with respect to the relevant contravention. [Schedule 2, item 7, subsection 1023Q(3) of the Corporations Act]

2.77 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 2, item 7, subsection 1023Q(2) of the Corporations Act]

2.78 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:

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

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if it makes such an order - make such other orders as it thinks are necessary or desirable because of that order.

2.79 There are a range of 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 2, item 7, section 1023R of the Corporations Act]

2.80 The Bill only creates a new cause of action for a contravention of an intervention order when the order is made under Part 7.9A of the Corporations Act. Equivalent amendments are not required in relation to intervention orders made under the Credit Act. The Credit Act currently contains arrangements for compensating consumers for loss or damage resulting from a contravention of a civil penalty provision or the commission of an offence against the Act. In particular, Part 4-2 of the Credit Act currently provides the court with powers to grant a range of remedies in such circumstances, including compensation orders. The existing provisions in Part 4-2 apply in relation to a contravention of an intervention order made under the Credit Act, as such a contravention is both a civil penalty provisions and an offence.

Consequential amendments

2.81 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 2, item 1, section 760B of the Corporations Act]

2.82 The Bill also inserts a new heading into existing section 765A of the Corporations Act to enhance the readability of the provision as amended by the new law. [Schedule 2, item 5, subsection 765A(2) of the Corporations Act]

Application and commencement provisions

2.83 Schedule 2 to the Bill commences on the day after the Royal Assent. [Table item 3 of section 2 to the Bill]

2.84 The power applies from the day after the Royal Assent. However, the power is not retrospective. It only applies in relation to products that may be acquired by consumers on or after the commencement date.