Australian financial service (AFS) licensees that offer OTC derivatives to retail investors located in some overseas jurisdictions may be providing unlicensed or unauthorised services in those jurisdictions.
Retail OTC derivatives are highly risky. Regulators in many jurisdictions (such as Europe, Japan, North America and China) have restricted or prohibited the provision to retail investors of certain OTC derivatives, such as binary options, margin foreign exchange and other contracts for difference (CFDs) to mitigate harm to retail investors.
AFS licensees are on notice that in addition to overseas consequences of potential breaches of overseas law, ASIC will consider whether breaching overseas law is consistent with obligations under Australian law to provide services ‘efficiently, honestly and fairly’. ASIC will also consider whether AFS licensee are making misleading or deceptive statements about the scope or application or effect of an AFS licence.
Commissioner Cathie Armour said, ‘AFS licensees offering OTC derivatives to overseas retail clients should, as a matter of priority, seek advice on the legality of their offerings to these clients. Any non-compliant activities should cease immediately and be notified to ASIC and the relevant overseas authorities.’
Developments in China and Europe
Chinese authorities have informed ASIC that: ‘some online platforms are illegally engaged in forex margin trading activities.’
Specific legal provisions have been implemented in China providing that ‘any unauthorized institution that conducts forex margin trading without approval [in China] shall be deemed to be in violation of the law. It is also illegal for any client (entity or individual) to entrust an unauthorized institution to conduct forex margin trading.’
Authorities in China have advised that no institution or agency has approval to carry out margin foreign exchange trading in China. AFS licensees with China-based clients may be conducting unlicensed or illegal activities in China if they are providing margin foreign exchange products to retail clients in China.
Temporary product intervention measures have recently been extended in Europe by the European Securities and Markets Authority (ESMA) (see here and here). Authorities in the United Kingdom and Germany have announced permanent measures. They include anti-avoidance provisions.
ASIC is concerned that some OTC derivative issuers that hold AFS licenses (or their agents) may be marketing or soliciting clients located in China, Europe and other jurisdictions to open accounts with Australian-based AFS licensees on the basis doing so will avoid the overseas intervention measures.
Commissioner Armour said: ‘AFS licensees who break the law in overseas jurisdictions, or who mislead retail investors about their services undermine the integrity of the Australian licensing regime. ASIC will not tolerate that conduct.’
Binary options are financial products largely used by retail consumers to ‘bet’ on an event. The potential outcome is binary, with consumers usually either losing the initial investment in full if their prediction is incorrect or receiving a fixed pay-out if they are correct.
CFDs are leveraged financial products that consumers use to speculate on the rise and fall in prices of underlying assets, such as foreign exchange, shares and crypto assets.
ASIC’s June 2018 Report 579 on Improving practices in the retail OTC derivatives sector, highlights our concerns with this sector. There are very concerning practices with misleading marketing materials, unclear pricing methodologies, inadequate risk management practices, inadequate monitoring of counterparties and inappropriate referral arrangements. The report also shows that the majority of consumers’ trading in these products is unprofitable.