ASIC flexes product intervention muscle

ASIC has intervened twice this week in the retail OTC derivatives and CFD markets.  The product intervention orders are the latest step in a sustained campaign by the regulator targeting trading of higher risk products by retail investors.  This campaign has spanned several years and involved Federal Court litigation, administrative action and now direct product intervention.  It is indicative of ASIC’s more muscular approach in focus areas and a willingness to utilise an array of regulatory tools to deal with what it perceives to be a risk to consumers.

The product interventions are not a surprise. They have been in the works at ASIC since it released a consultation paper in August 2019. Moreover, Beach J favourably referred to the intervention proposals in that consultation paper as having ‘considerable merit’ when handing down a $75 million pecuniary penalty decision in October 2020: ASIC v AGM Markets Pty Ltd (in liquidation) (No 4) [2020] FCA 1499.

So, it was only a matter of time before ASIC took this step, although the scale of the intervention is still significant.

Product Intervention

The interventions announced by ASIC are:

• A product intervention order restricting the issue and distribution of contracts for difference (CFDs) to retail clients (with effect since 29 March); and
• A further product intervention order announced today, banning outright the issue and distribution of binary options to retail clients, coming into effect from Monday 3 May 2021.

In both instances, ASIC intervened on the basis that the financial products “have resulted in and are likely to result in significant detriment to retail clients”.  The orders will be in place for at least 18 months.

ASIC’s restrictions on CFDs include capping the levels of leverage retail clients can use when investing in CFDs, and targeting CFD characteristics and selling practices that magnify losses, such as incentives to become a client or to make trades.

The outright ban on binary options followed ASIC reviews finding that around 80% of retail clients lost money trading binary options.  ASIC also said the products are likely to result in cumulative losses to retail clients over time because of characteristics such as the “all or nothing” payoff structure, short contract duration, and negative expected returns.

In general, any steps taken by ASIC to protect retail clients should be welcomed.  However, these steps may raise other risks from those looking to avoid restrictions, including that retail clients either:

• seek out, or be targeted by, unlicensed operators including those based overseas; or
• seek, or be encouraged by licensed operators, to become wholesale clients (and therefore lose these, and all other, retail client protections).

Finally, we note that ASIC’s intervention in these particular financial product types does not indicate that other types, or specific examples, cannot raise similar or greater levels of risk for investors.  This highlights the risk of unsophisticated perception that a lack of activity by a regulator in respect of a specific product, is an implicit endorsement of it.  Investors should seek professional, licensed financial advice before investing, regardless of the type of financial product or ASIC’s intervention in them, or lack thereof.

Further details regarding the coming into effect of the CFD product intervention order can be found in ASIC’s media release: 21-060MR ASIC’s CFD product intervention order takes effect | ASIC – Australian Securities and Investments Commission.

Further details regarding the product intervention order for binary options can be found in ASIC’s media release: 21-064MR ASIC bans the sale of binary options to retail clients | ASIC – Australian Securities and Investments Commission.

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