The Australian Securities and Investments Commission (ASIC) yesterday released Report 365 Hybrid Securities.
With investors chasing yields in recent years, $18 billion in ASX-listed hybrid securities was issued between November 2011 and June 2013, according to the report.
Report 365 highlights the complexity of the instruments, as well as the efforts the regulator has taken to educate Australian investors about them.
According to the report, ASIC has provided warnings and education to investors via its MoneySmart website. It has worked with issuers of hybrid securities and their lawyers to improve disclosure standards, and it has undertaken a review of the selling methods used in the sector.
The regulator also pointed to research by Investment Trends conducted earlier this year, which found that two thirds of direct investors are self-managed superannuation funds (SMSFs), and that financial advisers were only involved in 40 per cent of investors’ investments in hybrids.
Because a majority of investors are not receiving advice about hybrids, the prospectus should include a “short, easy-to-read explanation of the key features and risks of the security”, said the report.
In addition, the extensive use of pro forma emails and stand-alone offer summaries “at all levels of the sales process” requires investors to have access to detailed information about the features and risks of hybrid securities, said ASIC.
Finally, because a majority of hybrid investors are SMSFs that are seeking an income stream, “it is critical that investors understand that – unlike bank accounts or fixed term deposits – hybrid securities are not ‘government guaranteed’, involve the risk of capital loss, and may have their interest payments deferred for long periods”, said the report.
ASIC does not intend to take any further regulatory action in connection with the content of hybrid offer summaries or the way in which pro forma emails and stand-alone summaries are used, but the regulator will “continue to monitor the selling methods used for offers of hybrid securities”.
“We may undertake further targeted reviews to ensure standards are maintained. We will also investigate any reports of brokers promoting hybrid securities as fixed income products in a misleading fashion,” said the report.
The regulator also intends to determine whether tools can be developed so investors can “check their understanding of hybrid securities before investing in them”, according to the report.
ASIC warned that it may also consider “further naming conventions in relation to hybrid securities” to ensure hybrid instruments are not named in a way that will confuse investors.
