ASIC calls OTC derivatives retail brokers in Australia to comply with DDO requirements
ASIC’s Karen Chester expressed disappointment with the lack of progress by some high-risk retail product issuers in response to their DDO obligations. She emphasized that issuers should not solely rely on client questionnaires to meet their distribution obligations, especially for high-risk products that require a range of controls to ensure they reach the right consumers in their target markets.
ASIC emphasizes the need for better compliance with design and distribution obligations (DDO) for high-risk retail products.
The Australian Securities and Investments Commission (ASIC) is turning its attention towards over-the-counter (OTC) derivatives and other high-risk retail products in a bid to improve compliance with their design and distribution obligations (DDO).
A recent targeted review by ASIC has revealed that there is significant room for improvement in how these products meet their DDO. Online trading platform eToro has been sued by ASIC for allegedly violating these requirements.
60+ brokers offer high-risk OTC derivatives to retail clients in Australia
The DDO framework, which has been in place for over two years, represents a shift towards outcomes-based regulation. It requires financial products to be designed and distributed with a clear understanding of the objectives, financial situation, and needs of the targeted consumers and retail investors.
Over 60 Australian financial services licensees offer complex and high-risk OTC derivatives to retail clients, including contracts for difference (CFDs), crypto derivatives, and other novel derivative arrangements. Previous ASIC reviews in 2017, 2019, 2020, and 2022 have consistently found that most retail clients lose money trading CFDs.
In the latest findings released in Report 770, titled “Design and distribution obligations: Retail OTC derivatives (REP 770),” ASIC outlines how issuers of retail OTC derivatives are currently meeting their DDO obligations and highlights areas for improvement. The report urges issuers to:
- Address their over-reliance on client questionnaires as a primary distribution filter.
- Review their mass marketing of OTC derivatives.
- Make greater use of available data to assist in the design of derivative products, target market determinations (TMDs), and distribution arrangements.
Karen Chester, Deputy Chair of ASIC, expressed disappointment with the lack of progress by some high-risk retail product issuers in response to their DDO obligations. She emphasized that issuers should not solely rely on client questionnaires to meet their distribution obligations, especially for high-risk products that require a range of controls to ensure they reach the right consumers in their target markets.
Chester also waned against mass-market advertising of high-risk financial products, highlighting that without robust distribution controls, these products may end up in the hands of consumers for whom they are neither intended nor appropriate.
ASIC sued five issuers of retail OTC derivative products since Mar’23
Since March 2023, ASIC has taken regulatory action against five issuers of retail OTC derivative products for breaches of DDO, resulting in 10 interim stop orders related to retail OTC derivatives. Further investigations are underway, and ASIC has initiated design and distribution proceedings against a CFD issuer.
Chester emphasized that ASIC will not hesitate to take further action when it identifies DDO contraventions and the risk of consumer harm. The findings in REP 770 build upon ASIC’s earlier reports and interventions aimed at addressing consumer harms from OTC derivatives offered to retail clients.
The DDO framework requires financial product issuers and distributors to ensure that products are designed with consumer needs in mind and distributed in a targeted manner. It also mandates the monitoring of outcomes and the reassessment of product governance arrangements over time.
As ASIC continues its efforts to protect retail investors, issuers of high-risk retail products are urged to enhance their compliance with DDO obligations, ensuring that these products reach the right consumers while minimizing potential harm.
