ASIC's proposed powers

Australia's regulator, ASIC, is soon to receive a serious weapons upgrade that will go far beyond the old tools of product disclosure statement stop-orders and misleading or deceptive conduct remedies (although as noted above, these powers would have been more than adequate to stop the testimonial-style advertisement we described at the beginning of this article).

In summary, Treasury proposes that:

  1. Issuers of financial products to retail clients in Australia, and their distributors, will be caught by the new "design and distribution" obligations.

This means that Australia's 70 retail OTC derivatives product issuers will be caught – and so will any introducing broker operators who target people in the Australian jurisdiction.

  1. Issuers will be expected to identify appropriate target and non-target markets, distribution channels, and conduct ongoing review to ensure distribution is appropriate.

Australian issuers already have ASIC's RG227 which suggests that issuers maintain and apply a written client qualification policy that meets certain requirements. However, this regulatory guide does not have the force of law, and most brokers elect not to comply with some of the benchmarks on an "if not, why not" basis.

  1. Distributors will be expected to ensure their products are distributed in accordance with the issuer's expectations, and comply with reasonable requests for information.
  2. ASIC will have powers to make interventions in relation to the product, a product feature, or the types of consumers that can access the product or the circumstances in which consumers access it.

The paper provides examples such as imposing additional disclosure obligations, mandating warnings, requiring advert amendments, and restricting or banning the distribution of the product.

When looking closely at the commentary, it appears that ASIC may not be able to directly require restricted leverage. Rather, it can restrict who can access high leverage by saying something like "We think that offering leverage of more than 1:20 to retail clients would cause significant consumer detriment, so stop it." So, ASIC can achieve the same outcome, but possibly not as directly or easily as the FCA can (the FCA has broad product intervention powers).

The proposal paper is a bit unclear, however. For example, on page 36 it suggests that ASIC could set minimum standards for certain products or product features.

What is clear is that under this proposal, ASIC could require disclosure of standardised risk warnings, including profit-loss ratio, as well as prohibitions against bonus promotions. It can also restrict certain products, including products with certain leverage levels from being available to certain client groups.

  1. ASIC can make a product intervention if it identifies a risk of significant consumer detriment.

This will require ASIC to undertake consultation before making an announcement (the UK's FCA did this before its leverage/disclosure announcement too).

  1. ASIC's product intervention can only last for up to 18 months under the proposal, during which time the Government will consider whether the intervention should be permanent.

This stretches out the period from 12 months, as initially proposed in 2014. However, it falls short of the UK's permanent intervention power.

  1. In terms of timing, the obligations will apply to new products issued 6 months after the reforms become law. Existing products will have 2 years to come into line with the new obligations.

It's quite possible that these proposals will become law sometime in 2017.

Next steps

Consultation on the proposal paper is open until 15 March 2017. As we have done in the past, if industry participants have a shared desire to lodge a joint submission, we're happy to crowd fund something appropriate.

Our lawyers across Sydney and Melbourne have deep expertise in the matters discussed in this paper – which also span across into other product types, including insurance, superannuation, non-cash payments, credit, and managed funds. We would be happy to talk about this article in January 2017 when the office reopens.

Click here to read the full article on " OTC Derivatives (CFDs, Margin FX) Clampdown? Australia Proposes New Product Intervention Powers, Following Global Trend".

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