Catch 22 - How ASIC's Product Intervention Power Can Stifle Innovation

The Australian Government’s acceptance of all but one of the forty-four recommendations of the Financial Systems Inquiry (FSI) heralds a new era of government intervention.

Recommendation 22 introduces a new product intervention power enhancing the Government’s ability to modify or ban financial products where there is a risk of significant consumer detriment.

At present, financial products which have higher levels of risk for investors, including margin loans and contracts for difference, are subject to reasonably strict disclosure and marketing requirements.

The FSI recommendation provides ASIC with far-reaching powers to impose additional conditions on risky products. ASIC's powers could range from imposing additional requirements on the marketing of these products to a complete product ban.

Far-Reaching Implications

Whilst ASIC maintains that the banning of a product would be rare and occur only in very extreme circumstances, there is the opportunity for ASIC to restrict certain products from retail investors.

The implications for the Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term industry are significant, particularly for brokers who predominately provide services to retail clients – the bulk of the market.

The Government’s response to the FSI states that implementation of this recommendation will be subject to detailed consultation with stakeholders to ensure any action does not stifle industry innovation. However, given that the requirements for forex brokers are reasonably onerous already, it appears further intervention by ASIC would likely lead to a stifling of the industry at large.

Any changes to the Regulation Regulation Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Read this Term of derivative and FX products, no matter how slight, will impact industry participants. The impact will be felt by sales teams, compliance staff and may require expensive legal advice to ensure compliance.

In addition, any restriction on the ability to issue and sell these products will impact the profitability. For instance, removing derivative products from the retail space would be a cause of great concern for most brokers operating in Australia today.

Conclusion

It remains to be seen how ASIC will utilise its new powers and the extent to which it will intervene in the industry, but this is yet another example of the Government’s crackdown on the FX industry as a whole.