Post: ASIC takes aim at the distribution of OTC derivatives and other high-risk products to retail clients

ASIC is taking aim at the broad distribution of over-the-counter (OTC) derivatives and other high-risk retail products after a recent targeted review found significant room for improvement in how they meet their design and distribution obligations (DDO).

ASIC Deputy Chair Karen Chester said, ‘ASIC is disappointed that some high-risk retail product issuers have changed little in response to their design and distribution obligations.’

The introduction of DDO, now well into its second year, marked a significant shift to outcomes-based regulation. Ultimately, it requires financial products to be designed and distributed with clear and contemporary consideration of the objectives, financial situation and needs of the consumers and retail investors being targeted.

Over 60 Australian financial services licensees offer complex, high-risk OTC derivatives to retail clients in Australia, such as contracts for difference (CFDs), crypto derivatives and other novel derivative arrangements. ASIC’s review examined the DDO practices of a sample of issuers and follows earlier ASIC reviews in 2017, 2019, 2020 and 2022, which found that most retail clients lose money trading CFDs.

The findings released today in Report 770 Design and distribution obligations: Retail OTC derivatives (REP 770), outline how issuers of retail OTC derivatives are meeting DDO and highlights areas for improvement. REP 770 calls for issuers to:

address their over-reliance on client questionnaires as a primary distribution filter;
review their mass marketing of OTC derivatives; and
make greater use of available data to assist the design of derivative products, target market determinations (TMDs) and distribution arrangements.
‘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,’ said Ms Chester.

Since March 2023, ASIC has taken regulatory action against five issuers of retail OTC derivative products for breaches of DDO. This has resulted in 10 interim stop orders relating to retail OTC derivatives, with further DDO-related investigations of high-risk product issuers underway. ASIC recently commenced its first design and distribution proceedings in the Federal Court against a CFD issuer (23-204MR) and will continue to take appropriate regulatory action where it sees DDO contraventions and risk of consumer harm.

‘We will not hesitate to take further action, from stop orders through to court proceedings, especially where we see egregious failures. Our recent penalty proceedings against a CFD issuer is our third DDO-related civil penalty proceeding. This follows our previously commenced proceedings against the distributor of an investment product and an issuer of a credit product. We have further stop orders under consideration and several other DDO-related investigations underway, including for high-risk investment products,’ Ms Chester concluded.

The findings of REP 770 build on ASIC’s earlier findings in Report 762 Design and distribution obligations: Investment products. The report also follows ASIC’s extension of its product intervention orders which strengthened retail investor protections by banning binary options and imposing leverage ratio limits and other conditions on the issue and distribution of CFDs (22-082MR and 22-243MR).

Report 770 Design and distribution obligations: Retail OTC derivatives

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