Andrea Beatty Discussion on Product Intervention Order Power

Andrea Beatty, Partner at Piper Alderman provides her insights following ASIC’s exercise of the product intervention order power. She will be chairing our upcoming seminar, the 4th Annual Credit Law Conference, where she will provide her commentary on a variety of topics facing the credit law sector, including the product intervention order power.

How has ASIC proposed to exercise its product intervention order power?

ASIC’s third exercise of its product intervention order power is targeting add-on insurance and warranties sold at car yards.

On 1 October 2019, ASIC released Consultation Paper 324 Product intervention: The sale of add-on financial products through caryard intermediaries (CP 324) to seek consultation on three factors:

• introducing a deferred sales model for add-on insurance products and warranties by car yards;
• having additional deferred sales model obligations such as ‘knock out’ questions and prohibiting warranty sales that provide low levels of cover; and
• collecting data from insurers and warranty providers so that ASIC can monitor whether an intervention is operating as intended.

When can the product intervention order power be exercised?

The power may only be exercised if ASIC reasonably believes that a product, or class of products, has or is likely to result in significant consumer detriment. CP 324 identifies the detriment of these products broadly as:

• redundant or duplicated insurance cover;
• policies under which the likelihood of an insured event occurring is remote (e.g. guaranteed asset protection insurance where the consumer paid a substantial deposit on purchase of the car);
• consumers being sold an excessive level of cover;
• lack of rebates when policy terminated early due to early payout of credit contracts;
• consumers being sold products under which they are ineligible to claim;
• lack of competition increases price of add-on insurance;
• overlap between insurance cover and statutory warranties;
• poor product design and low payout rates; and
• sales processes such as design fatigue and unfair sales practices[1]

What are the affected products and who will be affected?

The products to be affected by the next proposed use of the product intervention power include add-on motor vehicle insurance and warranty products. Add-on insurance products are defined to be:

• consumer credit insurance;
• guaranteed asset protection insurance (difference between amount owing on loan/lease and maximum amount that the vehicle is insured for);
• loan/lease termination insurance (difference between amount owing on termination of loan/lease and market value of vehicle);
• mechanical breakdown insurance;
• purchase price protection insurance (difference between amount that vehicle is insured for and purchase price of vehicle);
• tyre and rim insurance; and
• extended warranty products which are defined to be a contract under which either the dealer or a third party agrees to rectify, or arrange for another person to rectify defects with a vehicle but only if it issued to retail clients.[2]

However, if the products above are arranged or issued for no consideration, following a provision of personal advice to the client by a licensee or an exempt person or as a consequence of an extension to the term of a motor vehicle loan or lease, then they will not be affected.

The affected persons are those who issue affected products through an intermediary and intermediaries who arrange for retail clients to apply for or acquire affected products.

What are the conduct obligations that an affected person has?

An affected person must not, in connection with the purchase/lease of a motor vehicle issue through an intermediary, or arrange for a retail client to apply for or acquire an affected product, unless the following conditions are met:

• the client has entered into a contract to purchase/lease a motor vehicle or applied for a motor vehicle loan/lease (to prevent pre-emptive sales before the consumer has even acquired a vehicle);
• an “online consumer roadmap” has been made available to the client and three calendar days have passed since the consumer was provided with the online consumer roadmap (the deferral period) (i.e. not before the fourth day after the consumer was provided with the online roadmap);
• the client expresses an intention to apply for or acquire the product through a facility in the online consumer roadmap before the end of the deferral period;
• the intermediary must not initiate contact with the client about an affected product during the deferral period;
• the intermediary has identified by class the persons who it reasonably believes would not benefit from an affected product or option within that product, and the product/option is not made available in the online consumer roadmap to persons that the intermediary reasonably believes to fall within that class (i.e. there must be some information gathering by the intermediary to determine whether or not the client is within the class of people who would not benefit from the product);
• the intermediary has not engaged in unconscionable or manipulative sales conduct including, without limitation, representing to the client that if they do not acquire the product, they might be required to make payment from their own monies (or getting them to sign an acknowledgement to that effect); and
• for mechanical risk product (extended warranty product and mechanical breakdown insurance):
  • the cover provided by the affected product does not overlap with the manufacturer’s warranty or any statutory warranty;
  • the maximum individual claim amount is not less than $2,000;
  • the product has a right of cancellation and pro rata refund for the client;
  • the product does not require the vehicle to be serviced by the seller/lessor or its associates; and
  • for new motor vehicles and used vehicles less than 10 years old, the product does not include a servicing requirement more onerous (including as to frequency) than that required by the manufacturer’s warranty.

There are other obligations that must be met as well. These include maintaining a record of the date on which the online consumer roadmap was made available to the client and for an issuer of an extended warranty product, to provide data to ASIC requested by them and to ensure that any outsourced warranty administrator does the same and to reasonably assist any outsourced warranty administrator to do the same.

An “online consumer roadmap” is in relation to an affected product defined as an online portal through which the client can apply for or acquire the product, decline to apply the product or request more information about the product. The draft legislative instruments prescribe specific disclosure requirements. ASIC is welcoming submissions in response to the consultation until 12 November 2019.[3]

Has ASIC exercised their product intervention power before? If so, in what way?

 ASIC first exercised their power in September 2019 in relation to short-term credit models by releasing the ASIC Corporations (Product Intervention Order—Short Term Credit) Instrument 2019/917. This order is currently being challenged in the Federal Court by Cigno Loans Pty Ltd, one of the businesses affected by the order.

In August 2019, ASIC publicly consulted on their proposal to use their product intervention power to ban the issue and distribution of over-the-counter (OTC) binary options and impose conditions on the issue and distribution of OTC and contracts for difference to retail clients.[4] However, the order has yet to be legislated.

[1] CP 324 [50].

[2] Ibid [90].

[3] ASIC, ‘Consultation papers – CP 324 Product Intervention: The sale of add-on financial products through caryard intermediaries’, media release, 1 October 2019, https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-267mr-asic-consults-on-reforms-to-sale-of-add-on-financial-products-sold-with-cars/

[4] ASIC, ‘Consultation papers – CP 324 Product Intervention: OTC binary options and CFDs’, media release, 22  August 2019, https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-220mr-asic-proposes-ban-on-the-sale-of-binary-options-to-retail-clients-and-restrictions-on-the-sale-of-cfds/

Andrea Beatty is a commercial Partner at Piper Alderman focusing on financial services. She is a leading financial services lawyer who has been listed in Australia’s Best Lawyers every year since 2012 in the areas of financial institutions and regulatory practice. She has written five editions of the leading consumer law text ‘Annotated National Code’ published by LexisNexis, with the sixth edition currently in production. Andrea advises and represents clients including start-ups, Australian financial services licensees (AFSL) and Australian credit licensees (ACL) on all aspects of financial services regulation and corporate finance including licence applications, regulatory compliance projects and audits, regulatory enforcement defences, and regulator investigations and disputes. Andrea’s experience includes advising clients on financial products and channels, including peer to peer lending platforms, crowd funding, payment systems, crypto currency, reward programs, gift cards and financial services acquisitions, disposals and alliances. Andrea also has in-depth knowledge of privacy laws and regularly advises clients on data and privacy security and breach remediation. Andrea’s financial services blog and published articles can be found at www.andreabeatty.com.au. You may connect with Andrea via email: abeatty@piperalderman.com.au or LinkedIn