Report 384: Regulating complex products is the result of the work of ASIC's Complex Products Working Group.
The report acknowledges the benefit of financial market innovation and the “efficient allocation of resources” that can result from the take-up of complex products.
However, complexity can also increase the likelihood that retail investors will fail to understand the risks associated with a financial product, said the report.
“This can lead to an investor acquiring a product that is not aligned with the level of risk they are willing to tolerate, which can in turn have a negative impact on investor confidence if unexpected losses occur,” said ASIC.
“Therefore, it is important that product issuers and distributors effectively manage these risks to reduce the likelihood of mis-selling,” said the report.
ASIC lists agribusiness managed investment schemes, exchange-traded options strategy, hedge funds, hybrid securities, leveraged derivate products, complex managed funds, structured products and non-vanilla warrants as 'complex products'.
The corporate regulator has announced it will scrutinise the entire lifecycle of complex products, including the development stage, distribution, sale, and post-sale.
ASIC Commissioner Greg Tanzer said the “low-yield environment and the non-trending equity market over recent years” has contributed to the development of complex products.
“This development can have an impact on the realisation of ASIC’s strategic priorities of promoting confident and informed investors and financial consumers, and fair and efficient markets,” he said.
“Complex products, due to their nature, can be difficult for investors to understand. This can lead to them being mis-sold, particularly when investors are searching for yield,” said Mr Tanzer.
“We want those institutions selling these complex financial products to consider the risks outlined in this report in the context of their own business. It’s not a sustainable business model if your customers are losing money,” he said.
