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22-352MR ASIC intervention improves small amount lenders target market determinations
ASIC has today published a snapshot report following a review into small amount credit lenders compliance with the design and distribution obligations (DDO).
Report 754 highlights improvements lenders have made to their target market determinations (TMDs) following ASIC intervention. The report is relevant to all credit providers when drafting and reviewing their TMDs.
In this report, ASIC focuses on small amount credit contracts (SACCs) due to the overrepresentation of financially vulnerable consumers accessing these products, leading to a high risk of consumer harm.
ASIC Commissioner Sean Hughes said, ‘This review is part of a series of initiatives ASIC is undertaking to address compliance with the DDO regime. ASIC is working on targeted, risk-based surveillances and enforcement action, including issuing stop orders, and taking other regulatory action to address poor design and distribution of products. We are focusing on sectors and products that pose the greatest risks of consumer harm, applying a DDO lens when responding to poor consumer outcomes that we identify.’
‘These obligations mean that credit providers must design products that are likely to meet the likely needs, financial situation and objectives of consumers. Providers must also ensure their products are being distributed to consumers in the target market.’
Outcomes of ASIC’s review
ASIC observed that SACC lenders’ TMDs lacked detail in descriptions of their product and target market. Further, their review triggers were not sufficiently granular to be useful. The issues set out in ASIC’s report should be considered by all credit providers when drafting and reviewing their TMDs.
ASIC’s areas of concern include:
- Product descriptions. These typically used the legislative definition of small amount credit contracts to describe the product. In most cases these definitions are insufficient at describing key features and attributes of the specific product.
- Defining target markets. Many used descriptions of consumer classes that were too broad to be meaningful. Credit issuers will be in breach of their obligations if they do not provide enough detail in describing their target markets.
- Setting trigger reviews. These were also found to be too broad and unlikely to lead to reviews of TMDs where a review would be appropriate, and were therefore ineffective. Review triggers must establish events and circumstances that would reasonably suggest that the target market may no longer be appropriate.
Mr Hughes said, ‘All TMDs reviewed featured at least one of the shortfalls we identified. While SACC lenders have made changes to address the concerns identified, we expect all lenders to review their TMDs and product governance arrangements to ensure that they are complying with all of their obligations under the law.’
‘The nature of the DDO regime requires lenders to make continued improvements and refinements to their TMDs or products as they identify and respond to poor consumer outcomes resulting from these loans.’
ASIC is continuing to review TMDs, governance documents and data collected by SACC lenders from their periodic and trigger reviews. This work is part of a collection of TMD surveillances ASIC is undertaking to ensure the credit industry is designing and distributing financial products that are likely to meet consumers’ likely needs, objectives and financial situation.
DDO requires firms to design financial products that meet the needs of consumers, and to distribute those products in a more targeted manner. A TMD is an important requirement under DDO. It is a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (target market) and matters relevant to the product’s distribution and review.
Small amount credit contracts are contracts for loans of up to $2000 with terms of between 16 days to 12 months offered by non-bank lenders (National Consumer Credit Protection Act 2009).
The DDO obligations became law in October 2021, and ASIC has shifted its focus from facilitating implementation to active supervision and enforcement. Prior to the commencement of the DDOs, ASIC released Regulatory Guide 274: Product design and distribution obligations (RG 274) which sets out ASICs expectations for compliance and our general approach to administering the design and distribution obligations.
ASIC recently commenced civil proceedings against American Express Australia Limited (Amex), in the first case brought before the Federal Court concerning the design and distribution obligations (see 22-338MR).
ASIC’s work in the SACC space over the past few years has also included commencing civil penalty proceedings in the Federal Court against Ferratum Australia Pty Ltd for allegedly charging prohibited fees and overcharging consumers who paid off loans early (see 21-287MR). This matter is still before the court.
Since the DDO regime commenced in October 2021, ASIC has issued 21 stop orders. These stop orders directly address concerns that financial providers are issuing and distributing products that are not likely to meet consumers’ likely objectives, financial situation, and needs.