ASIC has taken aim at distributors of over-the-counter (OTC) derivatives after a review found improvements are needed in how they meet design and distribution obligations (DDO).
DDO requires financial products to be designed and distributed with clear consideration of the products’ objectives, financial situation and needs of retail consumers.
Over 60 AFSLs offer complex and high-risk OTC derivatives to retail clients such as crypto derivatives and contracts for differences (CFDs).
Earlier ASIC research between 2019 and 2022 found most retail clients lose money when trading CFDs. For example, during a volatile five-week period in March and April 2020, the retail clients of a sample of 13 CFD issuers made a net loss of more than $774 million, it said.
Some 10 interim stop orders have already been issued by ASIC since March 2023 to five issuers of retail OTC derivative products for DDO breaches, and further investigations are underway. This includes action against Saxo Capital Markets, Mitrade Capital and eToro.
ASIC is now calling for issuers to:
- Address their over-reliance on client questionnaires as a primary distribution filter
- Review their mass marketing of OTC derivatives
- Make greater use of available data to assist the design of derivative products, target market determinations (TMDs) and distribution arrangements
ASIC deputy chair, Karen Chester, said the regulator is concerned about a reliance on client questionnaires and mass-market advertising of the products.
“ASIC is disappointed that some high-risk retail product issuers have changed little in response to their design and distribution obligations.
“Product issuers should not simply rely on client questionnaires to meet their distribution obligations. 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.
“We are also concerned to see mass market advertising of these high-risk financial products. Absent robust distribution controls, such mass advertising, is likely to see these products end up in the wrong hands – consumers they are not intended or appropriate for.”
