ASIC has asked brokers to be careful about or reconsider offering high-risk products and services to retail investors, such as securities lending, crypto-assets and offers of ‘zero’ or ‘low-cost’ brokerage with a hidden true cost.
Some online-only brokers operate as authorised representatives of an AFS licensee. The regulator reminded licensees of their obligation to have adequate resources to monitor and supervise their representatives.
AFS license holders were also asked to carefully review and engage with the design of new products or services because ASIC will take action when licensees fail to meet these obligations.
Securities lending is not appropriate to retail investors
The Australian financial watchdog has seen an increase in the number of brokers offering securities trading, but recent weaker market activity has led brokers to seek to broaden their revenue base by offering securities lending, a high risk product that “may be unfair” to retail investors as they don’t have the same scale and sophistication to understand and manage the risks as institutionals have.
Securities lending involves one party (the lender) transferring title of their securities to another party (the borrower) who provides collateral in the form of shares, bonds or cash. The borrower pays the lender a fee and is required to return the securities, or equivalent securities, to the lender on demand or at the end of the loan term.
ASIC pointed out to the design features that may not be fair or appropriate to retail investors:
- bundling of securities lending with other services or automatic opt-in of clients to securities lending (i.e. clients are required to take active steps to opt-out)
- no pre-qualification or vetting of investors (e.g. based on experience, assets or income)
- a fee split that is heavily skewed in favour of the provider.
ASIC Commissioner Danielle Press said: “We will intervene or take action where we see unfair or inappropriate offers of securities lending arrangements to retail clients. Australian financial services (AFS) licensees may be liable for substantial civil penalties if they do not do all things necessary to ensure the financial services covered by their licence are provided efficiently, honestly and fairly.”
Investors may think crypto has similar risk and protections as shares
As to crypto trading, ASIC noted that brokers are increasingly offering these products which are unregulated alongside shares and other regulated financial products through their trading apps.
That is concerning for the government agency as it may give investors a false sense of security, leading them to believe crypto-assets have the same protections as regulated financial products or they may underestimate the risks.
“Crypto-assets are high-risk, volatile and complex. Brokers should think very carefully before offering crypto-assets through their share trading apps. The differences in risks and protections must be made clear to investors. We expect brokers to do the right thing by their clients”, ASIC Commissioner Danielle Press added.
‘Zero brokerage’ claims may not be true to label
Australia’s financial watchdog has also shown concerns about brokers’ marketing of products and services to retail investors with headline rates of ‘zero’ or ‘low-cost’ brokerage. The regulator reminded brokers that misleading or deceptive conduct is against the law. Brokers that claim to offer zero or low-cost brokerage should carefully consider whether they may be in breach of the law, ASIC warned.
“We are concerned that ‘zero brokerage’ claims may not be true to label where the service is ‘bundled’ with other products or services that effectively subsidise brokerage and cause retail investors to take on additional risk. We strongly encourage retail investors to carefully consider what they are signing up for and make sure they understand the potential risks.”