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The Australian Securities and Investments Commission (ASIC) has filed a civil penalty action against American Express (Amex) accusing the card giant of knowingly violating Australia’s "design and distribution" rules.
In the complaint filed in Federal Court in News South Wales, ASIC alleges that Amex’s Australian subsidiary knowingly promoted two of its co-branded cards to an inappropriate target market.
This allegation, which relates to Australia’s design and distribution obligations (DDOs), is combined with a second allegation that Amex failed to act on excessively high cancellation rates as required.
The co-branded credit cards named in the complaint are the David Jones Amex Card and the David Jones Amex Platinum Card.
David Jones is one of Australia’s oldest and largest department store brands, and it began offering the Amex and Amex Platinum cards in 2008 and 2012 respectively.
Despite the cards’ many years on the market, the complaint refers only to the period between October 2021 and July 2022, during which ASIC alleges that Amex wrongfully issued almost 15,000 new cards.
According to ASIC, under the DDOs of the 2001 Corporations Act, Amex is required to make a target market determination (TMD) before offering the cards to consumers.
ASIC said a TMD must describe the class of retail clients that comprises the target market, and must specify any conditions and restrictions on retail product distribution.
In addition, a TMD must specify events and circumstances that would reasonably suggest that the determination is no longer appropriate. Together, these are known as “distribution conditions” and “review triggers”.
If a card issuer becomes aware of a review trigger, it must stop issuing the card within ten business days, and issuance must not be resumed until a full review of the relevant TMDs is completed.
In the first instance, ASIC alleges that Amex failed to limit issuance of the card to consumers who wanted to purchase on credit while earning points and benefits, as per its own TMDs.
ASIC added that between 80 and 90 percent of all David Jones Amex cards were applied for in-store, but there were clear signs that consumers applying through this channel were unaware of the nature of the product.
“Amex knew some consumers were confused about whether they had applied for a loyalty card or a credit card, and that this was a circumstance that indicated the TMDs were not appropriate and required Amex to review the TMD and stop issuing the credit cards,” said ASIC.
Secondly, ASIC alleges that Amex was aware that cancellation rates for cards that were applied for in-store were “significantly higher” than those applied for online, yet failed to act on this signal.
In the period from October 2020 to October 2021, monthly cancellation rates for cards that were applied for in-store ranged from 31 to 61 percent.
In contrast, over the same period, monthly cancellation rates for cards applied for online ranged from 10 to 32 percent.
In around August 2021, Amex set a target cancellation rate of 35 percent for the cards, but this target continued to be surpassed, sometimes significantly so.
Up until October 2021, for example, two David Jones stores saw cancellation rates of more than 80 percent.
During this period, ASIC notes that Amex was aware that one of the “key reasons” for the high in-store cancellation rates was that consumers did not understand that they were applying for a credit card rather than a loyalty card.
This was further emphasised in February 2022, when David Jones informed Amex that, during the previous month, cancellation rates for cards applied for in-store were over 55 percent, more than double the cancellation rate for cards applied for online.
In response, Amex and David Jones held working group meetings to “identify opportunities to reduce the cancellation rates” and to respond to complaints.
However, during the same period, Amex continued to issue the David Jones cards, despite one of its review triggers being “abnormal cancellation rates”.
Amex’s defence, as described by ASIC in the complaint, appears to rest on the fact that the cards had been on the market for so many years that Amex had failed to update its “key eligibility criteria” in the face of shifting market dynamics.
“Product providers must monitor and review whether consumers are receiving products consistent with their needs, and cannot bring a ‘set-and-forget mindset’ to product governance,” said Sarah Court, deputy chair at ASIC.
“It is critical that providers respond to poor outcomes they identify by making changes.”
Prior to the Amex complaint, Court said that ASIC has now taken multiple actions under Australia’s design and distribution regime, including issuing more than 20 interim stop orders.
“This regime turned a new page in the regulation of financial products in Australia, and is intended to deliver better outcomes for consumers,” she said.
“It is a priority for ASIC to maximise these increased protections and see the long-term benefits of the DDO regime realised.”
In a statement shared with VIXIO, a spokesperson for Amex said: "American Express takes any allegations made by ASIC seriously, and will continue to cooperate with ASIC in relation to this matter."
