Post: ASIC oversees more than $17.4 million in compensation to retail investors by OTC derivative issuers

ASIC has overseen more than $17.4 million in combined compensation payments to over 2,000 retail clients affected by breaches of financial services laws by eight retail OTC derivative issuers.

This compensation figure, being paid or agreed to be paid since March 2021, comprises:

a combined $4.3 million paid or agreed to be paid to over 1,500 retail clients of seven different issuers of contracts for difference (CFDs) since March 2021, due to issuing CFDs that exceeded the leverage ratio limits permitted by the ASIC Corporations (Product Intervention Order – Contracts for Difference) Instrument 2020/986 (PIO); and
approximately $13.1 million to 523 derivatives clients of Oztures Trading Pty Ltd trading as Binance Australia Derivatives (Binance) between May and September 2023, due to its incorrect classification of retail clients as wholesale clients which resulted in various other breaches of financial services laws. Binance’s Australian financial services licence was cancelled on 6 April 2023 following its request to voluntary cancel its licence (23-091MR).
CFDs issued with prohibited leverage ratios by the seven CFD issuers
Total compensation payments made by each of the seven CFD issuers ranged from tens of thousands of dollars to millions of dollars. In July and August 2023, ASIC reviewed the compensation payments made by the CFD issuers and their underlying compensation methodologies.

The affected clients suffered losses on more than 150,000 CFD trades across 100 different CFD instruments that exceeded the maximum leverage permitted by the PIO.

The seven CFD issuers were:

Capital Com Australia Pty Ltd
CMC Markets Asia Pacific Pty Ltd
Eightcap Pty Ltd
IG Australia (IG Markets Limited and IG Australia Pty Ltd)
Pepperstone Group Limited
Saxo Capital Markets (Australia) Limited
StoneX Financial Pty Ltd trading as City Index
All of the seven CFD issuers self-reported the breaches of the leverage ratio limits in the PIO, and proposed remediation programs to ASIC. Underlying causes for the breaches identified by some of these CFD issuers included:

change management weaknesses, including failures to adequately test and review IT systems after trading platform updates; and
manual errors when applying leverage ratio limits to CFD instruments and retail client accounts.
Each of these seven CFD issuers undertook remediation programs to compensate affected consumers.

ASIC review of compensation paid by the seven CFD issuers
While ASIC was satisfied that some of the seven CFD issuers’ compensation programs provided an appropriate outcome for affected clients, ASIC found:

three of the CFD issuers used certain behavioural assumptions to estimate retail client losses caused by the breaches of the PIO, which resulted in a lower compensation amount than an amount calculated as if the provider had not issued the over-leveraged CFDs at all; and
these same three CFD issuers, and one other CFD issuer, had not compensated clients for fees or charges incurred on CFDs issued in breach of the PIO or interest on these amounts.
ASIC’s review resulted in these four CFD issuers paying or agreeing to pay additional compensation totalling more than $2.8 million to retail clients. All of the seven CFD issuers cooperated with ASIC through the review and remediation of affected clients.

On 27 September 2022, ASIC published Regulatory Guide 277 Consumer remediation. While ASIC notes a number of the CFD issuers’ remediation programs predated the issue date of the guide, it clearly sets out ASIC’s views on remediating affected customers quickly and fairly. When calculating compensation, ASIC expects issuers to return the affected clients back to the position they would have been in, or as close to as possible, had the breach not occurred.

ASIC Deputy Chair Sarah Court said, ‘OTC derivatives are complex, high-risk financial products. It is important that retail clients get the protections they are entitled to under the law when dealing with these risky products. These protections include the CFD product intervention order, design and distribution obligations, and access to external dispute resolution through the Australian Financial Complaints Authority.’

Misclassification by Binance of retail clients as wholesale clients
Following ASIC’s review, Binance compensated retail clients who were misclassified as wholesale clients:

In May and June 2023, Binance paid approximately $7.8 million in compensation to 505 derivatives clients following its announcement on 24 February 2023 that it had incorrectly classified retail clients as wholesale clients; and
In September 2023, Binance paid over $5.2 million in further compensation to an additional 18 derivatives clients after finding that it had incorrectly classified these retail clients as wholesale clients.
As a result of Binance’s misclassification, these clients were not provided the usual consumer protections when trading retail OTC derivatives (e.g. failure to make a target market determination under the design and distribution obligations). They were compensated by Binance for net trading losses and fees between 7 July 2022 to 25 February 2023.

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