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ASIC takes aim at brokers offering high-risk products to retail investors

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The corporate regulator has issued a warning to trading platforms offering high-risk products to retail investors.

In a statement on Wednesday, ASIC issued a stern warning to brokers offering retail investors high-risk products, noting that action will be taken where “unfair or inappropriate” offers are detected.

Among the high-risk products and services being increasingly offered to retail investors since the onset of COVID-19 are securities lending, crypto-assets and offers of "zero" or "low-cost" brokerage where the true cost is often masked.

According to the corporate regulator, with the proliferation of trading platforms in the early days of the pandemic, high risk offers have increased particularly in recent months as market conditions have dampened retail investor activity.

The corporate regulator is particularly concerned with the addition of crypto-assets to trading apps alongside shares and other regulated financial products. Namely, according to ASIC, investors are being given a false sense of security, leading them to believe crypto-assets have the same protections as regulated financial products.

“Crypto-assets are high-risk, volatile and complex. Brokers should think very carefully before offering crypto-assets through their share trading apps. The differences in risks and protections must be made clear to investors. We expect brokers to do the right thing by their clients,” said ASIC commissioner, Danielle Press.

Regarding securities lending arrangements made to retail clients, Ms Press said: “Australian financial services (AFS) licensees may be liable for substantial civil penalties if they do not do all things necessary to ensure the financial services covered by their licence are provided efficiently, honestly and fairly.”

The corporate regulator also flagged instances of brokers marketing products and services to retail investors with headline rates of ‘zero’ or ‘low-cost’ brokerage using various digital marketing practices.

“We are concerned that ‘zero brokerage’ claims may not be true to label where the service is ‘bundled’ with other products or services that effectively subsidise brokerage and cause retail investors to take on additional risk,” Ms Press said.

“The law prohibits conduct that is misleading or deceptive, or likely to mislead or deceive, in relation to financial products or services. Brokers that claim to offer zero or low-cost brokerage should carefully consider whether they may be in breach of the law,” she continued.

At the onset of the pandemic in 2020, ASIC expressed concern that retail investors could be playing with fire as the number of newcomers entering the market during the volatile period spiked.

Namely, in the period between 24 February and 3 April, the corporate watchdog found that the number of new retail investors entering the market had shot up by 3.4 times.

Retail activity remains stronger than pre-COVID  

In its most recent report into Australian retail investors’ motivations, attitudes and behaviours, ASIC found that retail investor activity remained stronger than prior to the COVID-19 pandemic, despite recent market events which have slowed returns. 

Just this month, ASIC published its latest instalment of research exploring retail investors, which included a nationally representative online survey of 1,053 retail investors aged 18 and over conducted in November 2021.

The corporate regulator found that despite changes to economic conditions since the research was conducted, retail market activity has generally remained elevated this year compared to pre-pandemic levels.

“With so many new investors active in financial markets, the research builds on our understanding of retail investors and helps us consider where our regulatory efforts are warranted,” ASIC chair Joe Longo said.

The corporate regulator found that of the retail investors surveyed, 44 per cent reported holding cryptocurrency, making it the second most common product type held after Australian shares at 73 per cent.

“We are concerned about the number of people surveyed who reported investing in unregulated, volatile crypto-asset products,” Mr Longo said.

He noted that concerningly, only 20 per cent of cryptocurrency owners considered their investment approach to be risk-taking, raising concerns that investors did not understand the risks of this asset class.