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ASIC takes action to protect ‘new wave’ of retail investors

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The regulator has ramped up its supervision of online trading providers and taken multiple actions to protect investors from high-risk offers and business practices.

Online trading providers are at risk of facing “strong regulatory action” by the Australian Securities and Investments Commission (ASIC) in relation to potentially harmful offers of financial products and services to retail investors.

In a report published on Wednesday, the regulator observed that a “new wave” of retail investors had emerged from the COVID-19 pandemic, with a significant increase in retail investor participation in financial markets.

As a result, the number of online trading providers offering trading in regulated investment products has grown. These firms now collectively possess more than 1 million retail clients and billions of dollars in client money and assets.

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But ASIC noted that the average daily turnover in the retail securities market has fallen from a peak of $3.5 billion in February 2021 to $1.6 billion as at September 2023.

“To broaden their revenue base, some online trading providers now offer, or are seeking to offer, high-risk products or services to retail investors. These products may be inappropriate for retail investors and result in poor investor outcomes,” the regulator said.

During 2022–23, ASIC said that it ramped up its supervision of online trading providers and took a proactive and risk-based approach to its supervision of this group.

In order to protect investors from high-risk offers and business practices that may be “unfair, inappropriate or result in poor outcomes”, ASIC commissioner Simone Constant noted that the regulator has already initiated multiple actions against different firms.

“Our more proactive approach to identifying and disrupting emerging risks and harms is in response to the rapid pace of change we have observed in recent years. Today’s report and our recent consumer warning campaign are reflective of this,” she said.

Regulatory interventions by ASIC to date have included court actions, stop orders, and infringement notices. Firms who have fallen into the regulator’s firing line over the past year have included Interactive Brokers and eToro.

The regulator’s actions have centred around high-risk offers, inadequate supervision of representatives, misleading or deceptive statements, use of digital engagement practices such as gamification and influencer marketing and holding client assets and money.

“Licensed online trading providers are required to meet important licensee obligations as gatekeepers for offers of investment products and services to retail clients,” Ms Constant said.

“Where we identify significant harm, we will continue to take strong regulatory action including, where appropriate, commencing court proceedings.”

Last year, 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.

As part of its report released on Wednesday, ASIC observed that some of the products being offered, or planned to be offered, by online trading providers may be inappropriate for retail investors and expose them to new or additional risks.

In relation to misleading deceptive statements, the regulator said that some providers promoted their business through potentially misleading claims about low or zero brokerage fees, the safety and security of client assets and how they are regulated.

“The law prohibits conduct that is misleading or deceptive, or likely to mislead or deceive, in relation to financial products or services,” ASIC said.

“This applies to online trading providers who must ensure that any statements made in their promotion of financial products and services are true, accurate and able to be substantiated.”

Regarding digital engagement practices, ASIC noted that some firms have designed their platforms to incorporate behavioural levers and choice architecture that can unfairly influence decision making and lead to trading that may result in losses or consumer harm.

“Digital engagement practices have the potential to create a complex and potentially harmful ecosystem of stimulant experiences for investors,” the regulator said.

“This ecosystem may obscure the true cost to trade or encourage excessive trading or trading products which are inappropriate for retail investors where the risks may not be understood and result in investor loss.”

ASIC said that online trading providers should consider how the observations and areas for improvement outlined in its report apply to their business.

ASIC takes action to protect ‘new wave’ of retail investors

The regulator has ramped up its supervision of online trading providers and taken multiple actions to protect investors from high-risk offers and business practices.

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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