The Australian Securities and Investments Commission (ASIC) has released a report today on the findings of a recent surveillance program, which identifies some serious and common incompliances in the retail over-the-counter (OTC) derivatives industry in the country.
ASIC identified two interrelated trends in the course of the surveillance program: significant increase in the number of license applications from entities seeking to operate retail OTC derivatives financial services businesses in Australia, and growing non-compliance with the Australian regulatory requirements by existing AFS (Australian financial services) license holders.
The report of the Commission, entitled ‘Compliance review of the retail OTC derivatives sector’, covering forex, binary options and contract for difference (CFD) products, among others, assesses a large proportion of AFS-licensed retail OTC derivatives industry against seven compliance risks.
Here are ASIC`s key findings of the compliance review:
- over 80% showed issues with the disclosure in their Product Disclosure Statements or website;
- over 60% had undergone a change of control (with some issuers exhibiting multiple changes of control in a 12-month period) and 85% of those entities had failed to notify ASIC as required;
- over 50% had not adequately complied with their financial reporting obligations;
- around 50% required additional detailed assessment to determine whether they adequately complied with their net tangible assets requirements, and
- nearly 30% did not appear to be providing any financial service under their AFS license, despite some being licensed for a number of years.
Here are some of ASIC`s concerns: many AFS license holders appeared to be based overseas, while promoting the security of Australian regulation; a number number of smaller licensed companies that were foreign-owned (or controlled by a foreign firm) showed lack of awareness or understanding of Australian regulations; some of the firms holding ASIC licenses had outsourced key compliance aspects to third parties, some of which were related to the AFS licensees and based overseas (and were subject to little, if any, regulatory oversight in their home jurisdiction).
In fact, the commission obtained more than 150 regulatory outcomes as a result of the review conducted, including recapitalization to comply with financial requirements, improvements of defective disclosures, submission of overdue financial reports, cessation of unlicensed conduct, and AFS license suspensions and cancellations, etc.
“This report highlights some serious compliance failures in this industry. We expect industry to take note of our findings and proactively remediate any areas requiring improvement to ensure they have adequate and enduring compliance measures to fulfil their regulatory obligations”, Commissioner Cathie Armour commented.
“The report also provides a prudent warning to investors. We hope the report will encourage them to be more aware of the risks of these types of products as well as improve their understanding of the standards of practice they should expect from retail OTC derivative providers”, she added.
In recent years, ASIC has made a number of public statements about the disturbing degree of non-compliance in the retail OTC derivatives sector. Earlier this month, the Commission launched legal proceedings against National Australia Bank for market manipulation with the bank bill swap.
What is more, ASIC regularly publishes warning notices against unlicensed binary options brokers.