ASIC tightens the reins on CFDs

The Australian Securities and Investments Commission (ASIC) has put the spotlight on contracts for difference (CFD) due to the increasing popularity of this risky product among mum and dad investors.

In response to the rapid growth in the number of CFD traders and issuers in recent years, as well as the high number of retail investors, ASIC conducted a ‘health check’ of the market in 2009.

CFDs are highly leveraged derivative products that are marketed to and traded by retail investors. The majority are issued and traded over the counter.

“Our health check study shows CFD issuers need to lift their game in making sure investors understand how CFDs work and are aware of the very significant risks when trading these complex financial products,” said ASIC commissioner Greg Medcraft.

Based on a study into this area, ASIC found that retail investors are confused about how CFDs work, do not understand the significant risks in trading them, do not seek financial advice before investing and often do not receive sufficient information to make informed decisions about trading CFDs.

ASIC’s report recommended that an investor guide be released to enhance retail investor understanding of CFDs, that disclosure benchmarks be on an ‘if not, why not’ basis and that advertising continue to be monitored.

The report also recommended possible law reform should these reforms prove inadequate.

ASIC is also enhancing disclosure requirements in this area. It will soon release Regulatory Guide 212, ‘Client money relating to dealing in OTC [over the counter] derivatives’, which will provide issuers with clear guidance on ASIC’s expectations of what they need to do to comply with the client monies provisions of the Corporations Act and what information they need to disclose to investors, while a consultation paper on enhanced Product Disclosure Statement disclosure benchmarks for OTC CFD issuers will also be released.

“We want investors to get a clearer picture of what they are getting involved with and ensure CFD providers are honest and upfront with investors about the risks involved,” Medcraft said.