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

This is yet another example of the Australian government’s crackdown on the FX industry as a whole.

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.

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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.

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The implications for the forex 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 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.

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