The corporate watchdog will get sweeping new powers to ban “potentially harmful” financial products, under new laws forcing banks to put more emphasis on serving their customers’ interests.
In the latest change amid a wave of new regulations on banks, the federal government on Thursday unveiled draft laws to beef up the tools available to the n Securities and Investments Commission.
Under the changes, ASIC will get the power to ban products or behaviour that raise the risk of “significant consumer detriment,” a change that is intended to result in more timely and pro-active intervention from the watchdog.
Banks and other institutions will also be forced to design products to suit the needs of customers, with the threat of $1 million per civil breach, or jail time for criminal breaches of the new obligations.
The changes were recommended by the 2014 financial system inquiry and have been described as “game-changing” by legal experts.
Banks and other firms will be required to identify target markets for their products, in an attempt to make sure products are developed in response to genuine consumer needs, and sold appropriately. They will also have to take steps to make sure their proudcts are distributed appropriately, to the target market.
There will be new powers given to ASIC allowing it to clamp down on pay arrangements that it thinks are giving finance workers an incentive to promote product inappropriately, such as some types of commissions.
The office of financial services minister Kelly O’Dwyer said the new powers “will ensure that financial products are targeted and sold to the right consumers, and where products are inappropriately targeted or sold, ASIC will be empowered to intervene in the distribution of the product to prevent harm to consumers”.
The batch of changes include a “product intervention power” for ASIC, and “design and distribution obligations” for financial institutions that deal with retail clients, such as banks and wealth managers.
The changes, which come after a series of scandals in the banking and wealth management sector, were described as “game changing” by partners at King & Wood Mallesons in a previous note on a consultation paper of late last year, in part because of their emphasis on consumer needs.
An explanatory memorandum released by Treasury on Thursday noted that the proposed changes would force banks to only target a certain group of consumers with a product if the product would “generally meet the likely objectives, financial situations and needs of persons in the target market.”
Banks will not need to go to the same lengths as financial advisers who have to take into account the specific circumstances of individual clients.
However, former ASIC chairman Greg Medcraft has suggested the new laws could limit the banks’ ability to “cross-sell” customers extra financial products, such as when bank staff promote life insurance to transaction account customers.
Civil and criminal penalties can apply for breaching the new laws. Treasury said a breach of the design and distribution obligations could result in a penalty of up to five years prison for a criminal breach, or a fine of $1 million for a civil breach.