Analysis

ASIC Enforcement of Product Intervention Could Take up to 2 Years

Brokers will have until the beginning of April 2021 to prepare their businesses

ASIC-regulated brokers are expected to get circa two years to prepare their business for the new reality of retail trading regulations in Australia. Back in April, the Australian parliament has approved a change to the powers of the Australian Securities and Investments Commission (ASIC).

According to a new amendment in the Treasury Laws called Design and Distribution Obligations and Product Intervention Powers, firms will have until the 5th of April to comply with the new design and distribution obligations which the ASIC is expected to specify in the coming quarters.

A deadline is currently looming for all ASIC-regulated brokers – by the end of June, they have to present to the regulator a significant amount of data, mostly related to their clients. Back in April, the ASIC requested a significant amount of data from the brokers, mostly related to their clients.

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ASIC’s China Focus

After a delegation from the Australian financial regulator visited China at least two times over the past half a year, the ASIC has focused its effort on preventing local brokers from on-boarding Chinese customers.

Aside from that, the ASIC requested from brokers data on their business model, broad geographical composition of their clients base and legal opinions that certify that the brokers are allowed to operate in certain jurisdictions.

A mounting resistance on part of several regulated firms, however, forced the ASIC to soften the initial demands it made.

The mounting pressure resulted in several Australian brokers pulling away from China. The far-reaching arm of the Chinese State Administration of Foreign Exchange has proven to be a challenge to the sustainability of forex and CFDs brokers in China.

While some companies have been actively divesting away from the country, a big part of the Australian industry has been heavily reliant on a steady inflow of Chinese clients. With the looming changes to the regulatory framework, the value of Australian licenses is declining fast when compared to the final months of last year.

Extent of Product Intervention In Australia

Recent regulatory and media pressure on the industry has long been a worry for the retail brokerage industry in Australia. Speaking off the record to Finance Magnates, opinions of senior executives are providing a colorful picture of the future of the industry.

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While a couple of CEOs we spoke to, are convinced that Australia is going the way of the EU and will likely significantly limit leverage options for clients, others disagree. One senior executive painted a very gloomy picture for the local retail brokerage industry.

According to this particularly gloomy CEO, the ASIC might go as far as prohibiting retail clients from trading CFDs altogether. Aggressive rhetoric on part of several ASIC representatives towards the industry has been reaffirming of the extent to which retail brokers are likely to get scrutinized.

While in Europe brokers had the opportunity to reclassify a number of clients to professionals, such actions in Australia could prove to be much more difficult. Persons are required to have a qualified accountant’s certificate stating they have net assets of at least $2.5 million, or a gross income for each of the last two financial years of at least $250,000.

The Powers Explained

After the ASIC assesses a given product it can assess the level of detriment to consumers. Lack of features, poor design, lack of disclosure, or inappropriate distribution would be sufficient for the regulator to classify the product as causing a detriment to consumers.

A very important distinction that the regulator can make however is when classifying certain products as causing “significant detriment” to consumers. This basically entails any sorts of financial losses to consumers.

Stemming from the classification, the ASIC can go as far as banning a business from issuing a product or class of products to consumers; directing that a particular product or class of product only be offered by way of issue to particular classes of consumers (for example, not retail clients) or directing that a product or class of products cannot be distributed unless accompanied by an appropriate warning or label.

Product Intervention Term

While in Europe, the ESMA was limited to rolling out product intervention powers for periods of three months, the Australian law allows ASIC to issue stop orders for up to 18 months. As to the official mandate given to the regulator, it is focused on assessing potential detrimental effects to consumers stemming from the characteristics of the product offered to them.

Over the past couple of months, ASIC representatives have vocally singled out high-leverage products offered to retail clients. With the data set which the regulator has demanded from brokers, the watchdog will get an additional layer of information that would help it reach a final decision.

The Australian financial regulator has not provided a specific timeline as to when it will provide specific instructions about forex and CFDs products offered to retail clients. That said, industry insiders from the land down under expect guidance from the regulator before the end of this calendar year.

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