The Chief Executive Officer of Pepperstone, a foreign exchange (forex) broker, has appeared in front of the Select Committee on Financial Technology and Regulatory Technology of Australia to discuss its concerns on the fintech sector and ASIC’s intended use of its product intervention powers.
Tamas Szabo, the CEO of the broker, spoke in front of the Committee alongside Jason Noorman, the Chief Technology Officer of Pepperstone and Peta Stead, Group Head, Regulatory Affairs at the company on the 30th of January, 2020.
As Finance Magnates has previously reported, the broker’s CEO, in a letter to the Committee sent earlier in October of last year, called into question whether ASIC’s intended use of its product intervention powers, which includes placing strict leverage restrictions for contracts for difference (CFD) trading, is best for the industry.
When speaking in front of the Committee, Szabo highlighted that Australia is an attractive destination for innovation given the fact that it has primarily taken a principles-based approach to financial service regulation, however, now the regulation is moving away from this to a more prescriptive approach, as regulators are engaging with the industry less and instead using its regulatory toolkit when it has concerns.
“The banking royal commission has had far-reaching effects on the financial services industry more broadly beyond the major banks,” Szabo told the Committee.
“This has created a shift in the environment where the collaboration between industry and regulators has subsided and created a new environment mediated by lawyers and litigators, with the next headline in the press being seen as a win. The reputational damage to firms and industries using the approach is profound, also creating negative public perceptions.
Pepperstone: ASIC should learn from the FCA
When asked by the Committee how Australia could learn from other regulators, such as in the UK, Szabo outlined: “…the UK FCA implemented some restrictions around the types of products that we offer—moving away from the principles based approach that I think is necessarily a better approach—and there is evidence to suggest that some of the changes they’ve made haven’t worked particularly well.”
“When you restrict a product that is available online, clients have a tendency to search for that product elsewhere. There has been a large move of clients to various different jurisdictions offshore where the products are readily available.
“There are a number of problems with that. One is: obviously it affects local taxes and jobs. Our industry employs over a thousand staff in Australia, as I mentioned, but also pays roughly half a billion dollars in tax revenue. So that’s an important component for Australia. If products are restricted to the degree where, if clients can get them elsewhere quite easily, they will do that, then it will cost the economy and jobs. It’s a really important thing to point out, and it is quite ironic, that you’re pushing the customers to regulators that are offshore, to jurisdictions where it might not be as well-regulated as Australia.”
“I’m not suggesting that it should be a free-for-all, but there needs to be a careful balance put in place. You can restrict something here; it just appears over there, and there are no protections… It puts Australian investors in harm’s way. I don’t think that balance is being recognised by certain regulators around the world. And it’s pretty obvious to us what’s going on. We’ve been engaging with regulators to try and explain that situation.”
Powers were meant to be a last resort
Pepperstone’s CEO also highlighted that ASIC’s use of the power intervention measures goes against the recommendations of the Financial Systems Inquiry (FSI).
Namely, when the product intervention measures were first being considered by the FSI back in 2014, the authority said the measures should be used as a last resort. Moreover, the FSI said that: “If the power is used effectively, it should not significantly affect innovation.”
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However, Pepperstone’s CEO suggests there is some evidence that ASIC has not been meeting these requirements since inheriting its product intervention powers.
“…I don’t really think ASIC have met these hurdles, to be honest… So, rather than single out an industry as being bad or whatever, they should single out the actors that aren’t behaving themselves. I don’t think that’s happening in the way that it used to, and it creates real negative perceptions about industries and it affects the future direction of a business, clients might switch off to the products or whatever else.”
“I think that’s happening in a number of industries at the moment, where there’s bad perceptions out there, ASIC doesn’t have a remit to look at tax revenue, jobs—it’s not part of their sort of portfolio—so they’re making quite important decisions, I think, without the full appreciation of a lot of other things that are going on in the economy sometimes.”
ASIC’s measures will stifle innovation
When questioned whether Szabo believes that ASIC’s measures will reduce innovation, he replied: “Absolutely, and, if you look at the way it was implemented, if I was a firm that had any concerns with the regulators, it could be something that they could be targeted by.”
“As I said, ASIC have made public statements that they intend to use the power more frequently. I don’t know which products they might have in mind for that but I named a few of them earlier on. They could intervene if they felt it was appropriate rather than engage with the industry to achieve a better outcome.”
Following FSI recommendations is the best method
So what is the best strategy going forward? Following the recommendations of the FSI, according to Szabo. Namely, they should only be used as an absolute last resort, when every other avenue has been exhausted and industry engagement extensively sought.
“Having said that, our last meeting with ASIC was actually quite positive. There was a level of engagement that we hadn’t seen in quite some time, so I do hold some hope, but I don’t know if that’s necessarily going to continue. The problem is that, if the restrictions are put in place as they intend, there’s a lot of tax, jobs and everything at risk in Australia, and it’s not as if they will disappear; they will just end up somewhere else—in tax havens.”
ASIC’s measures are unclear
Speaking to The Australian on the sidelines of the inquiry, committee chair Senator Andrew Bragg said that ASIC’s measures were “unclear” and have created concerns from the business sector.
“If ASIC’s product intervention power is mishandled it could stymie innovation and consumer choice,” Bragg told the news outlet. “Everyone agrees with the idea of an intervention power, but the execution of it, if it’s not a very clear process, it could undermine new choices for Australians.
“I think the way ASIC is proposing to use it, in two instances right now, it’s been an unclear process. As a senator in the government I’ve looked at their process, they’ve put our papers on proposing to use it, while still working out their processes…”
“We need to make a clear statement around what our policy expectation is, rather than leave it to the regulators to do it in a haphazard way, which is highly undesirable.”