ASIC ups ante on DDO enforcement with first civil penalty action against American Express

ASIC has commenced its first civil penalty action in respect of alleged breaches of the Design and Distribution Obligations (DDO) regime, launching proceedings against American Express (Amex).

This first civil penalty action follows increasing surveillance and intervention by ASIC against financial services and credit providers for alleged breaches of the Design and Distribution Obligations (DDO) which took effect on 5 October 2021. It also follows ASIC’s identification of the action in respect of the DDO regime as an enforcement priority for 2023.

Amex and David Jones have issued co-branded credit cards since February 2008, including the David Jones American Express Card (DJs Amex Card). Amex issued a Target Market Determination (TMD) for the DJs Amex Card on 5 October 2021. However, according to ASIC’s case, Amex was aware that:

• Cancellation rates for consumers who applied for the DJs Amex Card instore at David Jones high, and significantly higher than cancellation rates for the same card applied online. For instance, in January 2022, the cancellation rates for DJs Amex Cards applied instore were 55.7%, more than double the 23.9% cancellation rates for online applications.
• Some consumers who applied for the DJs Amex Card in David Jones were confused about whether they had applied for a loyalty card or a credit card.

Despite this, Amex continued to issue the DJs Amex Card until 5 July 2022.

Under the DDO regime, Amex was obliged:

• to ensure that the financial product (i.e. the DJs Amex Card) suit the target market specified in the TMD;
• to ensure that under the distribution conditions in the TMD, the financial product will be distributed to the specified target market;
• to review the TMD, if it knows that a review trigger, or an event that reasonably suggests that the TMD is no longer appropriate, occurs.

The TMD for the DJs Amex Card provided that:

• Target Market: Consumers that are looking to make purchases on credit with a card that earns loyalty points and benefits;
• Distribution Conditions: Consumers must have annual income of $40,000 or more, pass responsible lending checks, be aged 18 years or over, and is an Australian citizen, permanent resident or holding a long term visa.
• Review Triggers: Included “abnormal cancellation rates”

ASIC is alleging that the DJs Amex Card TMD failed to comply with DDO, because:

• The Distribution Conditions did not limit the distribution of the DJs Amex Card to only people who were looking to earn loyalty points and benefits, as it seems open to anyone who earned more than $40,000 annually;
• The high number of cancellation rates of the DJs Amex Card in January 2022 constituted a Review Trigger, or otherwise an event that would reasonably suggest the TMD is no longer appropriate. At this point, under the DDO, Amex should have stopped issuing the DJs Amex Card and inform David Jones to cease distribution of the same, but failed to do so.

The action is a reminder that an interim stop order is not the only possible consequence for the breach of the DDO and that civil penalty action is a potential outcome where the conduct is considered significant or ongoing. 

As the first court-based action, the case will provide insight into how such actions are brought and defended.  If the matter settles, then useful insight on potential penalty will be gained. If it runs to trial we will see the first judicial consideration of the new regime.

Mackay Chapman

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.

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