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OTC derivatives under fire as ASIC probes retail product marketing
The Australian Securities and Investments Commission has set its sights on retail over-the-counter (OTC) derivatives in its crusade against the marketing of risky investments to the wrong investors, following product issuers’ lacklustre compliance with their design and distribution obligations (DDOs).
“ASIC is disappointed that some high-risk retail product issuers have changed little in response to their design and distribution obligations,” deputy chair Karen Chester said in announcing the findings of the regulator’s review of retail OTC derivatives under DDO obligations.
DDOs require issuers and distributors of financial products to make sure products are designed with consumer needs in mind and distributed in a targeted manner, monitoring outcomes and reassessing their product governance arrangements over time.
Under the DDO – which is “now well into its second year”, ASIC noted – issuers and distributors of financial products must provide a target market determination (TMD), a public document that sets out the class of consumers the product is appropriate for and other matters governing its distribution and review.
The report identified “areas of improvement” that it called on issuers of OTC products to address, including their overreliance on client questionnaires as a primary distribution filter. Issuers should also review their mass marketing of OTC derivatives and better use data in designing their products, including through target market determinations (TMDs) and distribution arrangements.
“Product issuers should not simply rely on client questionnaires to meet their distribution obligations,” Chester said. “These are high-risk products, which mean a range of controls are likely needed to ensure they get to the right consumers in their ‘niche’ target markets. We know the stakes are high for resulting harms if they end up with consumers outside of their stated target markets.”
She added that ASIC is “concerned to see mass-market advertising of these high-risk financial products”, which, unless properly controlled, “is likely to see these products end up in the wrong hands – consumers they are not intended or appropriate for”.
The introduction of the DDO signalled a “significant shift to outcomes-based regulation,” ASIC explained. “Ultimately, it requires financial products to be designed and distributed with clear and contemporary considerations of the objectives, financial situation, and needs of the consumers and retail investors being targeted.”
More than 60 Australian financial services licensees offer retail clients complex and high-risk derivative products, such as contracts for difference, crypto derivatives and other “novel derivative arrangements”, ASIC said. Its review looked at a sample of issuers’ DDO practices after earlier reviews found most retail clients lose money on CFDs.
The regulator has taken action against five issuers of retail OTC derivative products for DDO breaches since March, issuing 10 interim stop orders, and further investigations are under way, it said. And it recently launched its first Federal Court DDO action over CFDs, against online investment platform eToro, its third overall DDO-related civil penalty case.
“We will not hesitate to take further action, from stop orders through to court proceedings, especially when we see egregious failures,” Chester said.
