ASIC asked brokers to be cautious or reconsider offering high-risk products and services to retail investors, such as securities lending, crypto-assets, and “zero” or “ low cost” with a real hidden cost.
Some online-only brokers operate as authorized representatives of an AFS licensee. The regulator reminded operators of their obligation to have adequate means to control and supervise their representatives.
AFS licensees were also urged to carefully review and participate in the design of new products or services, as ASIC will take action when licensees fail to meet these obligations.
Securities lending is not suitable for retail investors
Australia’s financial watchdog has seen an increase in the number of brokers offering securities trading, but the recent decline in 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. because they do not have the same scale and sophistication to understand and manage risks as institutional investors.
Securities lending involves one party (the lender) transferring ownership of its securities to another party (the borrower) who provides collateral in the form of stocks, bonds or cash. The borrower pays a fee to the lender and is required to return the securities, or equivalent securities, to the lender upon demand or at the end of the term of the loan.
ASIC highlighted design features that may not be fair or appropriate for retail investors:
- bundling of securities lending with other services or automatic customer opt-in to securities lending (i.e. customers are required to take active steps to opt out)
- no pre-qualification or verification of investors (e.g. based on experience, assets or income)
- a distribution of costs that is strongly biased in favor of the provider.
ASIC commissioner Danielle Press said: “We will intervene or take action when we see unfair or inappropriate offers of securities lending agreements to retail clients. Holders of Australian Financial Services Licenses (AFS) can be subject to substantial civil penalties if they fail to do all that is necessary to ensure that the financial services covered by their license are provided efficiently, honestly and fairly.
Investors may think crypto has similar risks and protections to stocks
Regarding crypto trading, ASIC noted that brokers are increasingly offering these unregulated products alongside stocks and other regulated financial products through their trading apps.
This is concerning for the government agency as it may give investors a false sense of security, leading them to believe that crypto-assets enjoy the same protections as regulated financial products or that they may be underestimating the risks.
“Crypto-assets are high risk, volatile and complex. Brokers should think very carefully before offering crypto-assets through their stock trading apps. The differences in risks and protections must be clearly explained to investors. We expect brokers to do the right thing for their clients,” ASIC Commissioner Danielle Press added.
“Zero brokerage” claims may not be true to label
Australia’s financial watchdog has also raised concerns about brokers marketing products and services to retail investors with “zero” or “low cost” brokerage rates. The regulator reminded brokers that misleading or deceptive conduct is against the law. Brokers who claim to offer zero-cost or low-cost brokerage should carefully consider whether they may be breaking the law, ASIC warned.
“We are concerned that ‘zero brokerage’ claims are out of label when the service is ‘bundled’ with other products or services that effectively subsidize brokerage and force retail investors to take on additional risk. We strongly encourage retail investors to carefully consider what they are signing up for and to ensure that they understand the potential risks.