On 19 July 2024, the Federal Court ordered American Express Australia Limited (Amex) to pay $8 million in civil penalties for breaching the design and distribution obligations in Part 7.8A of the Corporations Act 2001 (Cth) (DDO), specifically those contained in subsection 994C(4). 

It is the second judicial outcome for ASIC about DDO, following the decision in ASIC v Firstmac Limited of 10 July 2024. That case was against a product distributor for failure to take reasonable steps that would have resulted in, or would have been reasonably likely to have resulted in, retail product distribution conduct being consistent with the target market determination (TMD), as required under subsection 994E(3) of the Corporations Act. 

This article provides a brief overview of:

• The judgment.
• ASIC’s enforcement focus.
• Parallels between what is happening here in Australia and in the UK, where a new Consumer Duty has been introduced. 

The judgment

Amex admitted two contraventions of subsections 994C(4) and (5) of the Corporations Act relating to two co-branded credit cards, the David Jones American Express Card and the David Jones American Express Platinum Card, (together, the DJs Cards) that were primarily distributed through David Jones department stores, and the TMDs for each card.

Broadly, subsection 994(4) relevantly requires an issuer to cease retail product distribution conduct within 10 business days if it knows, or ought reasonably to know, that an event or circumstance has occurred that would reasonably suggest that the TMD is no longer appropriate unless the TMD is reviewed and a new TMD is prepared (if required).

The Court accepted that Amex contravened this subsection in circumstances where:

1. Amex made TMDs for the DJs Cards and offered the DJs Cards for acquisition to retail clients;
2. Amex ought reasonably to have known, by 11 May 2022, that the cancelled application rates for DJs Cards was a circumstance that would reasonably suggest that the TMDs for the DJs Cards were no longer appropriate;
3. Amex did not, in the period between 11 May and 24 May 2022, review the TMDs for the DJs Cards; and
4. the distribution of the DJs Card was not excluded conduct (within the meaning of section 994A).

The Court did not accept that Amex contravened subsection 994C(5), which broadly required it to take all reasonable steps to ensure that David Jones was informed that David Jones must not engage in retail product distribution conduct in relation to the DJs Cards until the TMDs were reviewed and new TMDs were prepared (if required). 

This was on the basis that paragraph 994C(5)(c) relevantly requires actual knowledge that an event or circumstance has occurred that would reasonably suggest that the TMDs are no longer appropriate. It was an agreed fact that Amex did not have actual knowledge that the cancelled application rates for DJs Cards was a circumstance that would reasonably suggest that the TMDs for the DJs Cards were no longer appropriate.

ASIC’s enforcement focus

In ASIC’s media release, Deputy Chair, Sarah Court, stated that the Amex case “is an important decision, because it highlights the requirement for issuers and distributors of financial products to customers to have in place adequate systems to monitor events and circumstances that suggest a target market determination is no longer appropriate”. 

The decision serves as a prompt for issuers and distributors of financial products to review their current arrangements for monitoring events and circumstances that suggest a TMD is no longer appropriate and make any uplifts to ensure compliance with the DDO. 

This is important as three years after the introduction of the DDO on 5 October 2021, ASIC has deliberately and openly shifted its focus from facilitating the implementation of the regime to very active supervision and enforcement of the DDO. Notably, poor distribution of financial products is listed as one of ASIC’s enforcement priorities for 2024. 

To date, we have seen ASIC surveillance activity and reports relating to investments, choice superannuation, over-the-counter derivative and buy now pay later products and small amount credit contracts, as well as currently in the insurance sector with a focus on pricing and affordability. There have also been numerous DDO stop orders issued and civil penalty proceedings commenced. 

With regard to ASIC’s active interest in the DDO, issuers and distributors of financial products should expect that ASIC will act in relation to any breaches. 

Consumer Duty in the UK

There are some clear parallels between the DDO and what has been occurring in the UK, albeit for a much longer period.

Most recently, the UK has seen the introduction of a new Consumer Duty, which places a focus not just on the taking of reasonable steps to ensure good outcomes for consumers, but to positively demonstrate or evidence how they are in fact being achieved in practice.

The gathering and analysis of information through first-line monitoring of customer outcomes is central to demonstrating compliance with the UK Consumer Duty.

Australian financial services institutions are notably lagging in this area. For so long as this remains, the risk of successful enforcement action by ASIC remains material.