Obligation shifts to product manufacturers

Consumer behavioural economics is influencing Australian financial services regulation, says Matthew Ellis, special counsel with Norton Rose Fulbright.

He told the AILA conference there was a shift away from disclosure to obligations being imposed on product manufacturers. Two recommendations from the Financial Services Inquiry (FSI) that were likely to “come into play” were product governance and increased intervention powers for the Australian Securities & Investments Commission (ASIC).

Product governance required products to be suitable for the target market, but ASIC would have power to “influence terms & conditions, the way products are delivered, or even abandon products altogether”.

The current regime was founded on the 1996 Wallis inquiry recommendations that advocated consumers being free to decide what they wanted and to make informed choices, but bear the consequences of poor choices.

But in the post-global financial crisis context, disclosure alone was inadequate. “How many people read product disclosure statements,” Mr Ellis said. “Some products are too complex. People can make poor, irrational decisions, even if they’re given the right information.

“That’s where consumer behavioural economics (CBE) comes in. What influences your decision-making process? What are the nudges? Advertisers have been doing this for years.”

He defined CBE as: A method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making.

FSI’s recommendations 21 and 22 incorporated CBE.

21 - Product governance: Introduce a targeted, principle-based product design and distribution obligation

22 - Product intervention: Introduce a proactive product intervention power that would enhance the regulatory toolkit available where there is a risk of consumer detriment

Recommendation 22 would make issuers consider the full lifecycle of products, stress-test them before going to market, take a more proactive role in distribution and monitor after-sales information, like complaints, or a lack of claims with insurance products. The obligation would be scalable, depending on product complexity.

The product intervention power would allow ASIC to intervene with marketing and disclosure materials; warn consumers; or restrict distribution. No breach of law would be required for intervention.

While intervention with no legal breach was a “draconian response, it is a powerful negotiating tool”.

David Gilbertson QC, from the Victorian Bar, was a co-presenter with Mr Ellis.