The ‘novelty’ of a financial product should not be considered as a risk factor, according to the Australian Securities and Investments Commission (ASIC), as it assesses the risk of the collapsed Sterling Income Trust.
In its submission to the Senate inquiry into Sterling Income Trust, the regulator said one of the risks of the product was its novelty. However, it disputed that this categorisation should be brought in as a risk factor.
Sterling Income Trust was sold to investors as a ‘lease for life’ where their long-term tenancy was linked to investment performance. Investors were told the returns from their initial lump sum payment would be sufficient to cover the rent on the long-term lease and that would not be required to make any other payments towards rent, a strategy described by ASIC as “novel and high risk”.
When the scheme later collapsed, investors were left unable to pay their rent. This was particularly devasting for around 17% of investors who were dependant on the investment for their access to housing.
ASIC said it should not include the novelty of a product going forward would as it was a hard to determine what fit into this category.
“In ASIC’s view, ‘novelty’ should not be introduced as a risk factor in our criteria for regulatory enforcement action. The ‘novelty’ of a product is subjective and hard to define,” ASIC said.
“More fundamentally, imposing a higher regulatory burden on ‘novel’ products would be inconsistent with one of the aims of the Australian financial services regulatory regime, which is to promote competition, innovation and flexibility and enable retail investors to have access to a wide range of products.
“Nevertheless, ASIC considers that the ‘novelty’ of a financial product does already interact with our existing guidance for financial industry regulation. The Australian financial regulatory system’s focus on conduct and disclosure regulation means that any ‘novel’ features of financial products (along with any other relevant, non-novel features) must be clearly and adequately disclosed in the relevant product documents, to allow investors and consumers to make informed decisions in a transparent market.”