Australia financial regulator ASIC has issued what amounts to a warning to FX, CFD and Binary Options brokers in the country to clean up their act, in a release entitled ASIC calls on retail OTC derivatives sector to improve practices.
ASIC formally stated that it has called on participants in the retail over-the-counter (OTC) derivatives sector to improve their practices, after recent ASIC activities showed their conduct fell short of expectations.
The products offered by retail OTC derivatives issuers in Australia include Binary Options, margin foreign exchange (FX) and contracts for difference (CFDs).
A recent ASIC review of 57 retail derivative issuers identified a number of risks associated with the products offered to retail investors by OTC derivatives issuers.
ASIC’s review found that client losses in retail OTC derivatives trades seemed high, with the percentage of unprofitable traders being up to 80% for binary options, 72% for CFD traders and 63% for Margin FX traders.
ASIC didn’t give specifics as to whether it will actually do anything past issuing the warning to brokers, but did say that it will examine this area further as part of its ongoing focus on the sector. In Europe, pan European regulator ESMA recently introduced new strict rules governing OTC brokers which come into effect in the coming weeks across the EEA. ESMA’s measures include a blanket ban on Binary Options, a ban on inducements to trade such as deposit bonuses, and a limit on trading leverage ranging from a maximum of 30x on major FX pairs, down to 2x on cryptocurrency trading.
Back to Australia, ASIC said that its recent supervisory activities have also revealed sector-wide concerns about certain practices.
The most concerning practices ASIC has identified during in its supervision of the sector and highlighted in our recent reviews include:
- actual client profits being inconsistent with marketing materials.
- a lack of transparency around pricing.
- risk management practices that relied on the use of client money were outdated and needed to be reviewed.
- some referral arrangements that may be in breach of conflicted remuneration requirements and referral selling prohibitions.
- some issuers that were providing wholesale services or allowing third parties to ‘white label’ their products did not have adequate risk management practices and operational capital to supervise counterparties and support their exposures.
Binary options, according to ASIC, may be the least transparent in terms of underlying pricing, strike prices and payout structures.
To address these risks, ASIC has called on issuers to:
- review and update their risk management and client money practices; and
- assess whether their arrangements with counterparties and referrers meet their AFS licence obligations.
ASIC also took aim at the many referrers of business to OTC brokers – white labels, affiliates, and IBs – stating that brokers who make payments to referrers on a ‘commission’ or ‘volume’ basis must ensure they comply with their obligations. Where such referrers provide financial product advice, these payments may breach the ban on conflicted remuneration.
Some payments to clients for referrals may also breach the referral selling prohibitions. These may apply where an issuer tells a prospective client that they will receive a rebate, commission or other benefit, in return for providing names of further prospective clients, or helping the issuer to supply financial services to other consumers.
Brokers must also ensure that they are not facilitating unlicensed conduct by referrers. This may occur if unlicensed referrers behave in a way intended to influence a client about a product. Issuers should also ensure that their referral arrangements do not target clients that are not suitable for the products offered, do not breach Australian financial services licence investor protections, and do not breach financial services regulations in other jurisdictions.
ASIC Commissioner Cathie Armour said,
The retail OTC derivatives sector in Australia is an active and growing market, with an annual turnover of $11 trillion and over 450,000 investors. The integrity of the retail OTC derivatives sector is a key focus for ASIC. ASIC expects licensed issuers to conduct themselves appropriately and ensure consumers trade in retail OTC derivatives with a clear understanding of the products and the risks to which they’re exposed. We will be working with issuers to raise industry standards and improve compliance with their Australia financial services licence obligations.
More on the matter can be seen in ASIC’s report here (pdf).