The broker’s AFS license remains canceled until a final decision is made by the AAT on the substantive review application.
The Australian Securities and Investment Commission (ASIC) has canceled the Australian financial services (AFS) license of XTrade.AU Pty Ltd.
The retail over-the-counter (OTC) derivatives issuer, which offered clients opportunities to trade in contracts for difference (CFDs) and foreign exchange contracts (FX contracts), lost its ASIC authorization after failing to comply with its general obligations as an AFS licensee.
ASIC found that “several vulnerable clients were encouraged to trade in CFDs in circumstances where they could not afford to do so or had limited trading experience resulting in significant losses to some consumers.”
AFS licensees’ design and distribution obligations require financial product issuers and distributors to ensure products are designed with consumer needs in mind and distributed in a targeted manner. Financial product issuers are also required to monitor outcomes and reassess their product governance arrangements over time.
XTrade awaits Administrative Appeals Tribunal’s final ruling
XTrade has held AFS license 343628 since 12 April 2010, but ASIC’s investigation found that between June 2018 and September 2022, XTrade:
- engaged in unconscionable conduct;
- did not take reasonable steps to ensure that its representatives complied with financial services laws;
- did not have adequate arrangements for the management of conflicts of interest;
- failed to take reasonable steps to ensure its retail product distribution was consistent with its target market determination;
- did not do all things necessary to ensure that financial services were provided efficiently, honestly and fairly.
The regulator added that XTrade put its own interests above those of its clients and did not act in good faith, falling short of the standards expected of an AFS licensee. Additionally, the FX/CFD broker failed to prevent its representatives from engaging in misconduct over many years and failed to ensure that they underwent adequate training.
Although XTrade applied to the Administrative Appeals Tribunal (AAT) on 29 April 2024 for a review and stay of ASIC’s decision to cancel the AFS license, the AAT refused XTrade’s stay application. The broker’s AFS license remains canceled until a final decision is made by the AAT on the substantive review application.
Australia tightened its rules on CFD products
Contracts for difference (CFDs) are leveraged derivative contracts that allow a client to speculate on the change in the value of an underlying asset, such as foreign exchange rates, stock market indices, single equities, commodities, or crypto-assets.
ASIC has taken regulatory action to protect consumers from high-risk OTC derivative products, including:
- enacting the CFD product intervention order (PIO) from 29 March 2021, imposing restrictions on CFDs issued and
- distributed to retail clients (ASIC Corporations (Product Intervention Order – Contracts for Difference) Instrument 2020/986);
- extending the CFD PIO until 23 May 2027, which has been effective in reducing the risk of significant harm to retail clients
- resulting from CFDs (Report 724 Response to submissions on CP 348 Extension of the CFD product intervention order);
- releasing Report 770 Design and distribution obligations: Retail OTC derivatives on 6 September 2023 which summarises ASIC’s key observations on how issuers of retail OTC derivatives were meeting these obligations and highlights areas for improvement; and
- overseeing 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 derivatives issuers 23-298MR.
Previous enforcement actions against retail OTC derivatives issuers include a $75 million penalty against AGM Markets and its authorized representatives OT Markets and Ozifin; a $20 million penalty against Forex Capital Trading Pty Limited; additional conditions on the AFS license of AxiCorp Financial Services Pty Ltd; the suspension of Prospero Markets’ AFS license.
