ASIC commences civil penalty proceedings for alleged DDO breaches for the first time

After indicating that credit card providers were going to be targeted for design and distribution obligations (DDO) compliance and foreshadowing an industry-wide review, ASIC has now commenced proceedings against American Express Australia Limited (American Express) in relation to two co-branded David Jones American Express credit cards.

ASIC’s allegations are underpinned by data revealing cancellation rates during different time periods and across distribution channels for the cards.

Target market determination allegations

ASIC is alleging that there were deficiencies in the purported target market determinations (purported TMDs) made by American Express for those cards. ASIC says that, despite what American Express knew about high cancellation rates and complaints for the cards and certain other matters, the purported TMDs did not include distribution conditions that limited the distribution of the cards to consumers who were looking to make purchases on credit with a card that earnt reward points or other benefits, in accordance with the identified target market for each of the cards.

As a result, ASIC alleges there was a failure to comply with the requirements of section 994B(8)(a) of the Corporations Act. Section 994B(8) requires that a target market determination for a product must be such that it would be reasonable to conclude that, if the product were to be issued, or sold in a regulated sale to a retail client in accordance with the distribution conditions, it would be likely that the retail client is in the target market. ASIC says:

• that failure means that the purported TMDs were not ‘target market determinations’ within the meaning of section 994A(1) of the Corporations Act; and
• as a result, from 5 October 2021 to 5 July 2022, American Express contravened section 994B(2) of the Corporations Act.

Review trigger allegations

ASIC also alleges that by February 2022 American Express was aware of high cancellation rates for the cards when applied for in-store, that those rates were significantly higher than for cards applied for online and that complaints indicated that some consumers were confused about whether they had applied for a loyalty card or a credit card. As a result, ASIC also alleges that:

• by 4 February 2022 American Express knew, or ought reasonably to have known, that a review trigger had occurred for one of the cards and that an event or circumstance that would reasonably suggest that the TMDs were no longer appropriate had occurred in relation to both cards; and
• from 18 February 2022 (ie. 10 business days later) to 6 July 2022, by failing to cease issuing the cards and take all reasonable steps to ensure that distributors were informed that they must not continue distributing the cards, American Express contravened sections 994C(4) and994C(5) of the Corporations Act.

ASIC is seeking a pecuniary penalty order under section 1317G(1) and any other orders the court considers appropriate under section 1101B of the Corporations Act for the alleged contraventions.