UPDATE 2-Australia sues AmEx on alleged breach of credit card distribution laws

(Recasts with more details on the lawsuit)

Dec 6 (Reuters) - The Australian securities regulator on Tuesday took the local unit of American Express Co (AmEx) to court alleging two of its credit cards co-branded with retailer David Jones were issued and distributed without ensuring customers understood them.

The Australian Securities & Investments Commission(ASIC) alleged in a lawsuit that AmEx knew some customers would be confused whether they had applied for a loyalty card or a credit card, and that it failed to limit distribution to customers looking for a card that earns points and other benefits.

The card payment service provider was aware of the high cancellation rates among customers who apply for credit cards at David Jones outlets, compared with their online counterparts, ASIC said in a statement.

The regulator, in the first-of-its-kind lawsuit, is seeking a penalty on AmEx from the court, as well as compliance with obligations passed last year that require firms to design financial products which made customers fully aware of its features.

"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," ASIC Deputy Chair Sarah Court said.

AmEx and South Africa's Woolworths Holdings, which owns the department store chain, did not immediately respond to Reuters' request for comment. (Reporting by Sameer Manekar and Himanshi Akhand in Bengaluru; Editing by Shounak Dasgupta, Uttaresh.V and Dhanya Ann Thoppil)