Senate

Revised Explanatory Memorandum

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

Chapter 4 Statement of compatibility with human rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018

4.1 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

4.2 The Bill contains measures to:

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strengthen product issuer and distributor accountability by implementing design and distribution obligations; and

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introduce a financial product intervention power for the Australian Securities and Investments Commission (ASIC).

4.3 The design and distribution obligations will apply to most issuances of financial products and securities for which a disclosure document is required as well as financial products that are not regulated under the Corporations Act, but are regulated under the ASIC Act.

4.4 The design and distribution obligations regime will:

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ensure that offerors make a target market determination for each product to which the new regime applies, including specifying the target market for the product and other relevant matters such as any conditions and restrictions on the distribution of the product;

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ensure that offerors develop a plan for reviewing that determination and abide by that plan. The plan must provide for triggered reviews (reviews that must be undertaken upon the occurrence of an event or circumstance that would suggest that the determination is no longer appropriate) and periodic reviews (reviews that must be undertaken if the determination has not otherwise been reviewed during a period specified by the issuer that must be reasonable);

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ensure that offerors specify what information distributors must collect and keep, and when that information must be provided to offerors. In particular, the offeror must specify any information that the offeror needs to identify whether the target market determination should be reviewed and specify reasonable reporting periods for the provision of this information;

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ensure that offerors make their target market determinations available to the public free of charge;

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prohibit distributors from distributing a product to which the regime applies unless a current target market determination is in place;

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ensure that offerors and distributors take reasonable steps so that distribution is consistent with the most recent target market determination;

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ensure that distributors and offerors maintain necessary records in support of the new regime. Offerors must collect and keep complete records of their decisions in relation to key aspects of the new regime (e.g. the target market determination for the product and plan for reviewing the determination) and the reasons for those decisions. Distributors must collect and keep records of distribution information (being numbers of complaints and distribution information specified by offerors) and information relating to their obligations under the new regime;

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ensure that distributors must provide to offerors numbers of complaints about the product and any distribution information relating to the product which the offeror has specified in its target market determination;

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ensure that distributors must notify a product's offeror, and an offeror must notify ASIC, of a significant dealing in a product that is not consistent with the product's target market determination;

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ensure that ASIC is given powers to enforce the new arrangements, including: the ability to request necessary information; issue stop orders; and, make necessary exemptions and modifications to the new regime;

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ensure that a person who suffers loss or damage because of a contravention of the design and distribution obligations may recover that loss by civil action and that the court dealing with the action can make appropriate orders;

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ensure that ASIC may ask the court to make orders to benefit non-party consumers who have suffered loss or damage because of a contravention of the DDO regime for which a private action could be commenced; and

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ensure that advertisements and promotional material in relation to the product describes the target market for the product or specifies where the determination is available.

4.5 The design and distribution obligations will become effective two years after the legislation receives Royal Assent.

4.6 The product intervention power will allow ASIC to intervene in relation to financial and credit products, that may be acquired by consumers, by making orders to prohibit specified conduct related to the product. However, such an order may only be made where ASIC is satisfied that the product has resulted in, or will or is likely to result in, significant detriment to consumers. In addition, an order cannot apply to a product held by a person if the person acquired, or entered into a contact for the acquisition of, the product before the order comes into force.

4.7 Under a product intervention order, ASIC may prohibit a broad range of conduct in relation to a product either entirely or subject to conditions. However, such conditions may not require that a person holds a financial service licence, meets a training or professional standard, or becomes a member of an external dispute resolution scheme (where the law does not otherwise require these things) or be related to a person's remuneration (except so much of the person's remuneration as is conditional on the achievement of objectives related to the product). Similarly, the order may apply in relation to a broad range of persons expect consumers or a person who is in a class of persons specified in the regulations.

4.8 A product intervention order may only last for up to 18 months (or such shorter period prescribed by regulations) unless the Minister provides approval for the duration of the order to be extended. Before providing such approval, ASIC must provide the Minister with a report relating to the extension and the Minister must consider that report.

4.9 The new product intervention regime also:

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ensures that a product intervention order may be made in relation to an individual product or, by legislative instrument, in relation to a class of products;

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ensures ASIC consults affected parties and APRA (where necessary) prior to making an intervention order and makes all orders and related matters public;

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ensures that ASIC may amend and revoke intervention orders where necessary - noting that the Minister must approve such an amendment or revocation after consider a report from ASIC if the Minister has previously approved an extension of the order;

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ensures it is an offence: for a person to fail to comply with an intervention order (including an order to take reasonable steps to notify past customers of the terms of an order); and, for a person who has been served with an intervention order to fail to take reasonable steps to ensure that other persons who engage in conduct to which the order applies are aware of the order;

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ensures that a person who suffers loss or damage because of a contravention of an intervention order may recover that loss by civil action and that the court dealing with the action can make appropriate orders; and

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ensures that ASIC and the Minister may delegate their functions and powers under the regime in line with existing delegations in relation to comparable matters.

4.10 The product intervention power legislation will commence upon receiving Royal Assent.

4.11 The design and distribution and product intervention regimes generally impose both civil and criminal penalties in relation to each obligation under the regimes. This will allow ASIC or the prosecutor (as the case may be) to take a proportionate approach to the enforcement of the new regime. Applicable penalties are broadly consistent with those applying to similar offences that currently apply under the Corporations Act.

Human rights implications

4.12 The Bill engages, or may engage, the following human rights:

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the right to the presumption of innocence; and

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the right to privacy.

Engagement of the presumption of innocence

4.13 Paragraph 2 of Article 14 of the International Convention on Civil and Political Rights (ICCPR) protects the right of a person charged with a criminal offence to be presumed innocent until proven guilty according to law. The presumption of innocence is also a fundamental principle of the common law. As the Parliamentary Joint Committee on Human Rights has observed, the presumption of innocence 'imposes on the prosecution the burden of proving the charge, guarantees that no guilt can be presumed until the charge has been proved beyond reasonable doubt, ensures that the accused has the benefit of doubt, and requires that persons accused of a criminal act must be treated in accordance with this principle'. ^[56] The presumption of innocence generally requires the prosecution to prove each element of a criminal offence beyond reasonable doubt.

Offence provisions that carry an evidential burden

4.14 An offence provision that requires a defendant to carry an evidential burden may be considered to engage the right to the presumption of innocence.

4.15 A number of offences in the design and distribution obligations and the product intervention power regimes contain offence specific defences for which the defendant carries an evidential burden. In accordance with the Criminal Code Act 1995 and the Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers ^[57] , offence specific defences in the Bill are made explicit through words of exception and exemption.

4.16 The evidential burden in those defences has been reversed because the subject matter of the defence is:

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peculiarly within the knowledge of the defendant; and,

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significantly more difficult and costly for the prosecution to disprove than for the defendant to establish.

4.17 Details of each defence and the relevant subject matter are in the following table.

Table 4.1 Offence Specific Defences

4.18 The offences are critical to the operation of the regime. The imposition of an evidential burden for the defences achieves a legitimate object because it ensures that the offences are prosecutable, thereby allowing effective enforcement of the new regime.

4.19 The burden of proof on the defendant is an evidential burden. The effect of the imposition is therefore that the defendant must merely adduce or point to evidence of the defence. Once this is done, the prosecution bears the burden of proof.

4.20 Because of the low evidential burden on the defendant, to the extent that imposing that burden is a limitation on the right to be presumed innocent, it is proportionate and reasonable in the circumstances.

Self-incrimination

4.21 Related to the presumption of innocence is the right to be free from self-incrimination under article 14(3)(g) of the ICCPR.

4.22 The Bill allows ASIC to request information from offerors and distributors for the purposes of administering the regime. This includes information related to the person's decisions in relation to key obligations in the Bill, including criminal penalty provisions. This potentially engages the right against self-incrimination because the person who ASIC requests the information from must provide it to ASIC.

4.23 Record-keeping obligations apply to the two key aspects of the regime that ensure products are targeted at consumers for whom they are appropriate. Offerors are required to keep records of decisions relating to the making and review of target market determinations and the reasons for their decisions. Distributors are required to keep records of the actions they take to ensure products are distributed in accordance with the target market determination (that is, the reasonable steps they took). ASIC may require offerors and distributors to provide these records to ASIC.

4.24 The purpose of the record keeping obligations is to assist offerors and distributors in complying with the regime. A requirement to keep records formalises the decision-making framework for offerors and distributors and will aid their approach to compliance with the regime. The requirement to provide these records to ASIC on request will ensure ASIC is able to effectively monitor the regime. On this basis, engaging the right against self-incrimination in this way is necessary and justified to ensure the regime operates effectively.

4.25 The Bill also requires that distributors notify issuers of significant dealings outside the target market (and issuers must notify ASIC of the same), however, dealing outside the target market is not of itself an offence or an element of an offence. The notification of a significant dealing therefore does not indicate that a person was involved in an offence. As such it is not considered that this aspect of the Bill engages the right against self-incrimination.

Engagement of the right to privacy

4.26 Article 17 of the International Covenant on Civil and Political Rights (ICCPR) requires parties to the ICCPR to uphold the individual right not to have one's private, family and home life or correspondence unlawfully or arbitrarily interfered with. It also includes the right to protection by law of one's reputation. According to the Parliamentary Joint Committee on Human Rights' Guide to Human Rights, the right to privacy includes:

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the right of respect for confidential and private information, particularly the storing, use and sharing of such information; and

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the right to control dissemination of information about one's private life.

4.27 The Bill may engage the right to privacy because:

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offerors can specify information about the distribution of products that distributors must then collect and provide back to the issuer. This is information is needed so offerors can identify whether the target market determination should be reviewed;

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distributors must provide numbers of complaints about an offeror's product to the offerors (no other information about the complaints has to be provided);

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distributors must notify offerors and offerors must notify ASIC of significant dealings outside the target market; and

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ASIC can require that the above information be provide to it.

4.28 Each of these aspects of the Bill is directed at ensuring information about how products are distributed can be used to improve product design. The Bill does not contain requirements that personal information be shared as part of these obligations for that purpose. In addition, the Privacy Act 1988 provides for the protection for personal information, including setting out Privacy Principles that apply to many private sector organisations subject to these obligations.

4.29 As such, it is unlikely that the Bill engages the right to privacy.

Conclusion

4.30 The Bill is compatible with human rights. It engages, or may engage the presumption of innocence and the right to privacy. However, to the extent the Bill places limitations on these rights, these limitations can be considered legitimate, rational and necessary in light of the objectives they aim to achieve, and reasonable and proportionate in their extent.