The Australian Securities and Investment Commission (ASIC) has today published a report entitled ‘Compliance review of the retail OTC derivatives sector’, covering FX, binary options and contract for difference (CFD) products, among other instruments under its derivatives definition.
The report is relevant to Australian Financial Services (AFS) licensees and entities that provide them support such as legal and/or compliance services providers.
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Retail OTC focus
As part of the review, ASIC assessed 55 licensees against seven key compliance risks, and then sent each AFS license holder a letter detailing applicable regulations and detailed penalties associated with the potential breaches identified.
ASIC explained in the report that it adopted an approach that helped foster working with the AFS licensees by giving them an opportunity to respond and remedy concerns.
In other cases, where continued non-compliance was observed, ASIC considered additional regulatory action against licensees, including license suspensions, cancellations, or other penalties and infringements.
Marketing and unlicensed conduct
The report noted that there has been a material increase in aggressive marketing by issuers of retail OTC derivatives. ASIC noted that this was observed especially via unsolicited emails and cold-calling.
ASIC further explained how this behavior increased the exposure of these types of products to residents in Australia who may not comprehend the relevant associated risks.
Furthermore, ASIC added that it observed a ‘dramatic increase’ in unlicensed conduct from entities offering binary options, and how these offshore companies are apparently unaware of the licensing requirement in Australia to offer binary options.
Seven compliance themes reviewed
ASIC noted that there are roughly 65 non-market participant AFS licensees that issue OTC derivatives to retail investors in Australia, as per its latest annual report. In April 2015, ASIC started a review of 55 of those firms, in order to review risks associated across 7 key areas.
The thematic review covered Net Tangible Assets (NTA) rules, notification requirements related to a change of control and new ownership requirements, and failure to comply with client money provisions.
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In addition, deceptive and misleading product disclosure statements (PDS) and website disclosures were reviewed, and along with financial reporting obligations.
Finally, the review included failures to supervise authorized representatives and their related non-compliance, as well as claims that no financial services are being provided under the AFS license.
Additional details and concerns brought up by ASIC in the review can be seen in the full 50-page report, as this article is meant as a brief summary and not an exhaustive report.
ASIC explained in the review that it found that many AFS license holders were based overseas, and heavily promoted the security of having Australian regulation to their clients, but had no real physical presence in Australia.
A large number of smaller firms with AFS licenses that were foreign-owned or controlled by a foreign company showed lack of awareness or understanding of their ASIC-related regulatory obligations.
ASIC has been cracking down on firms that hold an ASIC license while encouraging Australian investors to deal with their foreign-related entities outside of ASIC’s jurisdiction.
The regulator also noted that it was concerned that some of firms that hold ASIC licenses in Australia had outsourced many of their compliance aspects to third parties – meanwhile, some of the third party firms were related to the AFS licensees and based overseas and/or had little or no regulatory oversight in their home jurisdiction.
The report summarized ASIC’s key findings from the above-mentioned seven areas that the regulator had reviewed across the 55 retail OTC derivatives providers.
In total, the review led to over 155 regulatory outcomes for ASIC, thanks to the seven key compliance themes that were part of the thematic review, detailed in the table below.
The report below shows the percentage of non-compliance that firms demonstrated across the seven key areas reviewed by ASIC. The highest issue appears to be the PDS/website compliance.