Analysis

The Chinese Connection: What’s Behind ASIC’s Crusade against Brokers

Many Australian brokers have been heavily reliant on Chinese clients in recent years

If there is was any doubt about ASIC’s motives behind the latest crackdown on the industry, this morning’s news about firms getting an urgent letter from the regulator dispelled any suspicions. Australian retail brokers were asked by the regulator to suspend on-boarding clients from overseas, where the firms are not regulated.

While at first glance, the focus of the regulator’s message could be pointing at the EU, yesterday’s communique, which explicitly mentioned China is where we should be looking at. Memorandums of understanding have been long established between EU and Australian financial regulators, and rumors that ASIC representatives are to visit China in the coming months are spreading across.

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In the Name of Good Trade Relations

China is a lucrative trading partner of Australia and is probably the core reason why the country managed to avoid a recession for almost three decades. Industry figures in the land down under are instinctively tying the ASIC’s abrupt move this week to a response to requests on the part of Chinese authorities to protect local broker businesses which are well-connected.

In contrast to traditional practices, the Australian regulator sidestepped any consultations with the industry and went on a full frontal assault, asking brokers to submit a boatload of detailed business data early in the week and outright banning them from accepting new clients from overseas jurisdictions where the firms are not regulated.

The unprecedented move has some industry experts voicing an opinion that the brokerage industry can fight the Australian regulator’s decisions in court. While that indeed could be the case, any legal process could be very lengthy and costly for many brokers in the industry to be able to survive.

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Regulatory Arbitrage is Gone

While the abrupt action on the part of ASIC this week was indeed a surprise, the outcome wasn’t that far from an anticipated closure of some regulatory arbitrage opportunities. European clients which flocked to Australia last year, have been a welcome growth opportunity for the local industry, making the region a lucrative place to do business.

Technology providers, affiliate marketers, and regulatory license dealers are all about to experience the profound effects of ASIC’s actions directed to curtail the activity of local brokers. As of six months ago, some parties were asking exorbitant amounts for an Australian license. As of this week, the market has been virtually closed, as the offers are now surpassing demand by a significant margin.

Another Flight Offshore

As in the EU case from last year, the most detrimental result is for end-clients which are still looking to trade with high leverage. Those will now look once again to brokers located offshore, in remote jurisdictions that provide questionable protection.

While Australian brokers have remained mostly outside of this industry trend, the times are changing fast. Companies which don’t have offshore subsidiaries will start looking to open new ones to be able to mitigate the impact of the new restrictions which the ASIC demands.

In the meantime, EU brokers could breathe a sigh of relief – they will no longer be undercut by Australian firms offering better trading conditions to their clients. As is the case in any market – one party’s pain is another one’s gain. Regardless, the industry will once again need to adapt to yet another sharp turn. If history is any guide, this too shall pass.

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