The absolute hypocrisy of ASIC as it bangs its drum over the USGFX fiasco - FinanceFeeds

The absolute hypocrisy of ASIC as it bangs its drum over the USGFX fiasco

Andrew Saks

Australia’s regulatory authority uses blustering media releases to show its might, yet allows the same thing to happen quietly behind its own closed doors… and we all wonder why large, established firms are opposed to the draconian new CFD rules… Here is our investigation

Sydney Australia

Nobody likes a hypocrite.

In particular, nobody likes a hypocrite in a suit which exercises its authority and power over senior professionals who are quite simply going about their business in as much of a pragmatic and sensible way, continually working hard to ensure that their systems, methodology and corporate ethos are compliant with ever changing and increasingly bureaucratic rules.

The Australian Securities and Investments Commission (ASIC), one of the world’s most widely renowned regulatory authorities within the non-bank electronic trading and financial markets industry worldwide, is one such hypocrite.

Despite ASIC’s tremendous investment over ten years ago in a very highly advanced surveillance system developed by Irish financial software company First Derivatives which conducts real-time monitoring on all companies in Australia that carry an Australian Financial Services (AFS) license, picking up almost every irregularity or transgression immediately without annual compliance inspections, ASIC still sees fit to use its own media channel to blow its trumpet when censuring an embarrassing situation for Australia, but allows other matters, including illegal distribution of its own licenses abroad, to go unchecked.

ASIC has made a consistent point of hammering its point home when an FX or CFD brokerage in Australia goes bankrupt, or fails to return client money, and rightly so.

The demise of BBY in 2015 which had allegedly been trading whilst insolvent since 2011, along with some other high profile commercial bankruptcies prompted ASIC to begin its grudge against the FX and CFD industry.

Over the past eight years, it has become nigh on impossible for FX brokerages to obtain a new AFS license, yet ASIC hands them out freely to other retail financial services companies.

ASIC has been extremely vocal about its disdain for the FX industry, often stating on its half-yearly reviews that what it calls ‘margin FX brokers’ are on its agenda, and it will continue to tighten up on the entire FX business, often showing lists of firms that it has officially wound up and closed down.

All of this is well and good, it is fair to assume. Of course, we all want a good quality, transparent world in which the regulatory authority is respected and brokerages can onboard good quality clients who seek good quality companies in a prestigious jurisdiction, which Australia certainly is.

However, ASIC is not a benevolent dictator, it is a hypocritical one. A hypocritical one whose single goal is to drive FX brokerages out of business or offshore, which is a retrograde step. As FinanceFeeds rightly said, going offshore will destroy your business.

ASIC’s loud and proud public relations team have been championing the actions taken against nefarious FX brokerage USGFX which has gone bankrupt and left its customers high and dry; a company with ties to dodgy Israeli scammers and one that has had a dubious reputation in China.

ASIC not only censured the company, banned it from operating and made a public statement on USGFX’s position, but is now resorting to instigating a lawsuit against the firm for conducting business in China.

Anyone in the FX industry of any standing must have had their eyes closed for the past few years. Every time I attended any FX industry conference in China, USGFX was there in full form, demonstrating how many introducing brokers it had across China, and with a fully staffed Chinese sales team in full view.

Only now does ASIC decide that it is going to sue USGFX for operating in the People’s Republic. ASIC alleges that Union Standard International Group Pty Ltd (USGFX) provided leveraged FX trading and other financial services to Chinese clients. ASIC launched the investigation into the Sydney-based firm and its two former representatives – BrightAU Capital Pty Ltd and Maxi EFX Global AU Pty Ltd. The firms are trading as TradeFred and EuropeFX, respectively.

You don’t say!

This has been blatantly obvious for quite some time.

What ASIC does not say, however, is that it wants to come down hard on companies like USGFX to attempt to demonstrate to its audience that it is doing the right thing, and rooting out evil, yet allows firms in China, the very nation it censures firms from operating in, to distribute ASIC licenses to Chinese entities without doing a thing about it.

Thus, it has a massive go at USGFX, yet does the same thing itself and keeps it quiet.

Three years ago, FinanceFeeds discovered the real reason that ASIC ceased to issue AFS licenses to FX brokers, which was down to criminals selling the wrong category of license to Chinese companies. We investigated this in detail from Hong Kong.

In mainland China, a region in which FinanceFeeds has extensively studied the entire fabric of the FX and electronic trading industry on a granular and nationwide scale, Australia’s AFSL (Australian Financial Services License) is regarded as highly credible, alongside Britain’s Financial Conduct Authority (FCA) regulatory structure as a bastion of reliability among Chinese partners and investors alike, who are conservative and ultimately concerned with the security of their often very large portfolios.

FinanceFeeds met  in 2017 in Hong Kong with Sophie Gerber,  Director of TRAction Fintech, which is based in Sydney, Australia and specializes in AFS licensing matters as well as providing legal and compliance services for the financial services and credit industries, who explained the real reason as to why Australia’s national financial markets regulatory authority has been continually restricting the issue of licences to FX brokerages, and stating in its annual reports and market reviews that it views the margin FX business with extreme caution, whilst issuing AFS licenses to all other financial sectors without delay.

ASIC’s official view is that FX trading often involves leverage and is a potentially risky form of retail investment.

ASIC has taken this line on all of its official documentation over the past few years and has emphasized its undertaking of proactive surveillance activities to ensure that existing FX brokers are meeting their AFS licence requirements, and is continuing to educate retail investors about the risks involved in FX trading.

Indeed, the existing established firms including Pepperstone, Invast Securities and Axi have a long standing provenance in the country and are likely to sustain and grow very long term businesses. Whilst not mentioned in the report, these companies are well known to be recognized and high quality domestic firms with very good track records.

“We are focusing on FX brokers that are not adequately disclosing the risks of trades to their clients, as well as ensuring that they are capable of managing their own risks and any conflicts of interest” is the anodyne corporate line.

Many seasoned experts have considered that ASIC had been taking this stance to protect the existing participants and to prevent further situations occurring such as that experienced when GTL Trade collapsed, but that is not the reason at all.

Discussing this three years ago with Ms. Gerber provided a comprehensive inside view into the real rationale behind Australia’s retraction from offering new licences, and the root cause lies among agents selling ASIC licenses which purport to be FX brokerage licenses, but are absolutely not, and in doing so have been extorting Chinese brokerages and partners, and creating a situation in which brokers think they are genuinely regulated when they are not.

Buy an insurance or superannuation license for $20,000, nip off to China and sell it for $1 million and tell them its an FX brokerage license

In 2017, ASIC issued a relatively sparse statement warning that insalubrious representatives were going to China and selling false AFS licenses, however the problem is more deep rooted than that.

The reality is that Ms. Gerber explained to FinanceFeeds “I’ll tell you how the system works form the bottom up.”

“One problem that we have in the industry is that the Chinese customers have very high levels of respect for Australian ASIC licenses so what has happened is that people some individuals have been banned for selling AFSLs to Chinese people.”

“There have been a few instances in which the licenses that were being sold were not even brokerage licenses, and yet the representatives were charging up to $1 million to Chinese companies, which is the approximate market rate for a genuine AFS license for an FX brokerage, however this was not a license for brokerage, it was for superannuation or insurance, or another non-brokerage financial service” – Sophie Gerber, Director, TRAction Fintech

Ms Gerber explained that at the time when this began being prevalent, many Chinese brokerage or customers did not know the difference, mainly because usually they check if there is an ASIC license and then check the license number, and viewed it as Australian regulation regardless of category.

“Nowadays they know how to check” said Ms Gerber. “In the mean time people have been buying licenses and had believed that they had been buying the correct licenses that would allow them to operate an ASIC licensed firm, with ASIC licensed responsible officers based in Australia and Australian directors” she said.

“The representatives that were selling these licenses to Chinese brokerages were buying them from ASIC from around $20,000 which is the approximate rate for an insurance or superannuation license, and then selling them to the Chinese brokerages for $1 million and telling them that it was an FX brokerage license” – Sophie Gerber, Director, TRAction FinTech

Ms. Gerber explained that many commercial customers came to her law firm stating that they have an ASIC AFS license for operating an FX brokerage, and when examining it, Ms Gerber noticed that in many cases it was not a brokerage license.

“This is the real reason why ASIC clamped down on margin FX business” she said. “Prosecuting individuals or companies for this activity would be very difficult because ASIC would have more ability to issue a civil penalty because to get a criminal penalty requires a higher standard, and it would have to be referred to the Department of Criminal Prosecutions. As a result, there are not many jail cases because the officials do not want the humiliatuon of losing a criminal case.”

“We have so many customers that come to us to have this issue resolved” said Ms Gerber. Melody Gao, a specialist lawyer at our company spends 70% of her work time dealing with this matter” she said at the time.

Wrong license, wrong message, whole business suffers

Ms. Grace explained “The other issue is that every time a broker realizes that it has been issued with the wrong license, the message does not get through to them that it is not allowed for them to use the wrong type of license. They usually think that it is alright because it is still an ASIC license, so they still continue to display it on their website.”

“ASIC then sends a letter to the firm saying that this is not allowed, and they then block the website in Australia. Melody Gao then checks in Chinese on Baidu without using the AFSL number and goes by the name of the company and finds that the company is still very prominent in China, even though Australia has blocked its English-language site and taken steps to have it de-indexed by Google.”

This highlights the lack of jurisdiction any nation has over China, which technically has its own, completely other-worldly internet and is irrelevant to Google or any rulings anywhere else in the world.

“These companies have Australian responsible managers and directors so it’s a huge risk for the industry” – Sophie Grace, Director, TRAction FinTech

“Unfortunately many responsible managers find it very difficult to get jobs, largely due to the lack of issuing of new AFS licenses which is as a result of this problem that the very same responsible managers are allowing to prevail, and also because of age issues, so they take their salary and do not put the pressure on the companies they work for to say that as a responsible manager, they could be held liable. Instead they do their paperwork and reporting, and keep quiet.”

Recourse

“If a Chinese client signed a contract that has the ASIC license on it, and it the wrong one, they can go to the Financial Ombudsman and complain and they do, it would have to be accompanied by a report relating to issues with losses on managed accounts or self-traded accounts. The broker usually is told that the broker has signed the agreement, however in many cases the responsible manager will say that he has not signed it” she said.

“There is no means for ASIC to remove these sites from China, as they cannot go to China and get the Chinese website taken down, and as a result there are many individuals going around China contracting for Australian companies that don’t even know they are contracting. This is very difficult to stop because ultimately the client usually loses so the Ombudsman would have to start prosecuting them in China to be able to prove that they are genuinely not related to that company that they are purporting to represent” said Ms Gerber.

“It is a monstrous abuse of the AFSL system and as long as it has value, it will continue. We have to educate the Chinese customers by outlining exactly what constitutes a proper broker.” – Sophie Gerber, Director, TRAction FinTech

Concluding, Ms Gerber stated that it would be much better for Australia if lots of overseas brokers came to Australia and wanted genuine AFSL licenses, however this situation is damaging and as a result ASIC has begun to cease issuing licenses and clamp down on everyone.

When assessing the case to sue USGFX, ASIC notes that FX trading in China has been restricted by a ban on currency margin trading, in which investors borrow money to trade. However, USGFX and its representatives appeared to have exploited Beijing’s regulatory loopholes, notably the fact their systems are based offshore.

How is this a case for a lawsuit, when ASIC licenses are readily available, albeit worthless ones, for sale in China?

Last week, FinanceFeeds looked closely at the equally abhorrent situation in which regulatory authorities do not seem to care about conflicts of interest in retail FX, in which we looked at how CySec doesn’t show any interest in resolving such matters including the matter that EuropeFX in Cyprus was operated by MAXIFLEX, EuropeFX’s Australian arm, which was a tied agent of now bankrupt USGFX, and had operated under USGFX’s license until recently.

USGFX’s bankruptcy was scandalous and has been a moot point among regulatory officials in Australia who see it as a blot on the copybook of the country’s reputation as a retail FX center. This is what the media bluster is really about.

So, if ASIC wants to retain its position as the most sophisticated and knowledgeable regulatory authority for FX firms, it should do so with an honest and level methodology.

Dropping a bomb on the established and good quality FX firms which then decide to move their business offshore due to unfavorable terms and conditions now being imposed is not a welcome modus operandi when ASIC only does so to bolster its image whilst allowing its own house not to be in order over the exact same issues.

 

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