ASIC Causing Apprehension for CFD and FX Brokers in 2017

The product intervention powers of the Australian Securities and Investments Commission (ASIC) under the Financial Services Inquiry are anticipated to come into effect in late 2017.

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Greg Medcraft, the current ASIC Chairman, has advised that ASIC’s focus for 2017 will be on ‘complex products’ such as Contracts for Difference (CFD), and tidying up the financial services industry. Mr Medcraft discussed his views on the proposed powers in an article on the Australian Financial Review dated 2 January 2017 entitled "ASIC’s Greg Medcraft says bank ‘subcultures’ failing to get the message".

Mr Medcraft said that the powers will give ASIC the ability to ban financial products, increase product disclosure obligations, make amendments to the advertising of products and restrict the distribution of certain financial products.

Waiting Game

In light of Mr Medcraft’s comments singling out the Australian retail CFD and foreign exchange industry, industry players will be waiting with trepidation to see how the proposed powers are applied if they are passed.

ASIC having the ability to ban products is cause for concern to many, given the lengthy and expensive review processes of ASIC decisions through the Administrative Appeals Tribunal and the Federal Court.

The CFD and FX industry has already been under severe scrutiny by ASIC in recent times. Mr Medcraft has assured the sector that the aim of the powers was to “fine-tune” specific financial products rather than outright ban them.

However, this doesn’t rule out potentially catastrophic changes such as reduced Leverage ratios. Interestingly, Mr Medcraft will leave his position as ASIC Chairman in November 2017 and the industry will have to wait to see whether the new ASIC Chairman will have the same view on “fine-tuning” the CFD and FX industries.

2017 Focus

As ASIC’s focus for 2017 is said to be on ‘complex products’, with CFDs being specifically mentioned, Mr Medcraft noted that such products were traditionally targeted at inappropriate investors who were less likely to profit from dealing in the financial product.

The intervention powers will allow ASIC to ban such products for retail investors, make the necessary changes to problem areas and fix the issues in order to improve the sector.

In December 2016, the treasury released a proposal paper entitled "Design and Distribution Obligations and Product Intervention Power" in which the Australian Government accepted a temporary product intervention power for ASIC. Under the proposal, ASIC would be given the following powers:

Amendments to marketing and disclosure materials for a product
Warnings to consumers, and labelling or terminology changes in relation to a product
Restrictions on how a product is distributed; and
Product banning.

Although the paper states that ASIC will be given the power to ban financial products, Mr Medcraft explained that the specific power to ban products would only be used in extreme circumstances. The regulator's focus would be more on the fine-tuning of how the financial products were dealt with, and a cleaning-up of the industry.

The proposal goes on to explain that ASIC will only be able to exercise such powers after it has identified that a particular product is of significant detriment to customers.

There is currently no indication when the bill to introduce the intervention powers will pass through Parliament. However, as the consultation period on the proposals does not close until 15 March 2017, it is anticipated that the proposals will not become law until at least the end of 2017. This is of course subject to a number of intervening factors including:

The ability of the current Australian Government to pass the legislation; and
Movements in global regulation, especially in a potentially fast de-regulatory environment being promoted by Donald Trump (e.g. his dismantling of Dodd Frank).

Any changes to the issuing of FX and CFDs is sure to be felt across the entire sector, with many brokers seeking alternative regulatory regimes as CySEC and the FCA clamp down. The way that ASIC implements its new powers will be a hot topic if they are passed.

This article was written by Sophie Gerber, Director at Sophie Grace and TRAction Fintech.