The Australian Securities and Investment Commission (ASIC) has found “significant room for improvement” in the design and distribution obligations (DDO) around the distribution of over-the-counter (OTC) derivatives and other high-risk retail products. These products include contracts for differences (CFDs) and crypto derivatives.

ASIC Sees Room for Improvement around DDO

Announced today (Wednesday), the Aussie regulator concluded that financial services providers offering these complex investment instruments over-rely on client questionnaires as a primary distribution filter, must review their mass marketing of OTC derivatives, and use “available data” to improve obligations.

“Product issuers should not simply rely on client questionnaires to meet their distribution obligations. These are high-risk products, which mean a range of controls are likely needed to ensure they get to the right consumers in their ‘niche’ target markets,” said the Deputy Chair of ASIC, Karen Chester. “We know the stakes are high for resulting harms if they end up with consumers outside of their stated target markets.”

“We are also concerned to see mass-market advertising of these high-risk financial products. Absent robust distribution controls, such mass advertising is likely to see these products end up in the wrong hands – consumers they are not intended or appropriate for.”

Protecting the Interest of Retail Traders

ASIC implemented the DDO rules in October 2021 and has strictly enforced these obligations for financial services companies. It requires financial services providers to ensure products are designed with consumer needs in mind and distributed in a targeted manner. They must also monitor outcomes and reassess their product governance arrangements over time.

To date, it has taken action against five issuers of retail OTC derivative products for DDO breaches, including names like Saxo Capital Markets and Mitrade. Last month, ASIC sued eToro for DDO lapses in its CFDs offerings. It was the first lawsuit brought by ASIC against a CFDs broker for the breach of DDO rules.

“ASIC is disappointed that some high-risk retail product issuers have changed little in response to their design and distribution obligations,” Chester added.

Apart from the DDO rules, ASIC heavily restricted the leverage brokers offer to retail traders until May 2027. It even banned binary options, which will be in effect until October 2031.