ASIC’s 2015 strategic plan includes crackdown on retail forex customer acquisition methods

Australia has carved out a worldwide reputation for being among the choice destinations for the establishment of retail FX companies, largely due to its highly well organized financial markets economy, stringent regulatory oversight and good business ethics, as well as its close proximity to the much coveted Asia Pacific region and the willing and plentiful potential client base that the region heralds.

Such widespread acclaim has led to Australia having been host to an influx of newly established FX companies as well as branch offices of ubiquitous firms such as IBFX and FXCM.

Of late, the Australian Securities and Investments Commission (ASIC), has begun to display concern regarding the proliferation of retail FX firms, and more importantly, the method by which they conduct business and its potential effect on retail customers.

LeapRate reported recently that many FX industry participants had witnessed a considerable delay in the approval of ASIC AFS licenses for FX firms, whereas AFS licenses for other financial services businesses in Australia which operate in sectors apart from FX were being approved without any delay at all. Furthermore, ASIC began issuing warnings to retail customers about the potential pitfalls of FX firms, as well as castigating some well known companies in order to demonstrate that ASIC is looking at the activities of all FX firms on a macro level.

Indeed, within the regulatory authority’s statements during the course of this year, it has been clearly announced that FX firms will be the subject of much scrutiny in future.

Today, ASIC has made a further statement to this effect, this time within a completely new initiative, which it terms its Strategic Outlook.

Until now, ASIC had relied on its six-monthly enforcement reports in order to detail the actions it has taken, as well as provide full information as to its focus for the months ahead, however the Strategic Outlook sets out the key risks ASIC sees to the markets it regulates, and how ASIC will respond, yet again prioritising its tools of surveillance and enforcement.

ASIC scans the environment continually and uses the intelligence it gathers from its wide range of stakeholders. This document brings analysis of underlying trends together with the key risks to investors, financial consumers, and the sectors and participants it regulates for 2014–15.

Given the current sentiment within ASIC, it is therefore perhaps no surprise that FX is high on the list of priorities. Indeed, as the regulator continues its focus on stemming the practice of insider trading, it also plans to commit significant resources to monitoring FX companies, including the bank sector and its potential to be able to manipulate financial benchmarks. Additionally, ASIC will be examining existing and potential wrongdoing in the bank bill swap reference rate and foreign exchange markets.

Furthermore, following a backlash by a Bitcoin association in Australia resulting from the Australian Tax Office’s treatment of virtual currencies, as well as the sweeping international acceptance of cryptocurrency, ASIC has realized that Bitcoin may pose regulatory challenges. Therefore, ASIC cites that Digital currencies (e.g. bitcoins) will test regulatory boundaries as their popularity grows. Similarly, crowdfunding is changing the way consumers can invest and will pose new challenges.

Interestingly, ASIC takes a dim view of weak compliance systems, poor cultures, unsustainable business models and conflicted distribution which may result in poor advice, mis-selling and investor loss, especially in managed investments. This highlights ASIC’s interest in monitoring the means by which clients are acquired by firms. Last year, ASIC put a stop to the conduct of the notorious and flamboyant antics of Robert Lloyd Wilson, known by his rather lowbrow alias “Aussie Rob”, who claimed up to 120% returns from his dubious Lifestyle Trader software. This practice is clearly a tactic which ASIC wants to banish from Australia.

ASIC considers that in circumstances in which licensees have weak compliance systems or poor cultures, there may be loss of assets, inadequate compensation arrangements or unlawful benefits given to related third parties.

On this basis, the regulator remains concerned about the culture of financial services businesses, and the incentive structures they use. ASIC’s view is that financial services business should have policies, processes and procedures in place to comply with their legal obligations. The welfare of their customers should be at the heart of their business. Controls must be implemented, followed and reviewed for effectiveness.

ASIC also considers that traditional business models in financial services and markets are being disrupted by new digital strategies at an accelerating pace. In financial services, crowdfunding and peer-to-peer lending platforms are disrupting traditional ways of accessing capital. In Australia’s markets, ASIC is aware of digital disruption in high-frequency trading and dark liquidity.

Whilst last year, ASIC recognized dark liquidity as part of the financial landscape, these strategies offer investors and financial consumers additional ways of interacting with our financial services and markets, create competition, and raise new challenges for firms and regulators.

ASIC expects continuing developments to create additional opportunities for digital disruption, including more advances and take-up in the use of mobile technology for financial transactions, online investment advice, and peer-to-peer platforms that connect investors and businesses seeking finance Š increased use of ‘big data’ by financial services providers to customise their marketing, as well asŠ increased opportunities to engage and empower consumers through interactive data innovations, such as calculators and product comparison tools.

ASIC Chairman Greg Medcraft said, ‘Being transparent about our role and priorities, the risks we see and how we will respond helps our stakeholders better understand what we achieve and why.’

ASIC has identified risks around globalisation, innovation-driven complexity, gatekeeper conduct, and the different expectations and uncertainty the public may have about what ASIC can achieve.

Mr Medcraft said, ‘Importantly, where we see non-compliance, we will act quickly and decisively through our detect, understand and respond approach.

‘ASIC is a law enforcement agency and we will take action against entities, regardless of their size or reputation.

‘At the same time, those we regulate must act in the long-term interests of investors and financial consumers to ensure that trust and confidence in the Australian financial system remains strong.’

To download the full ASIC report click here.

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