ASIC keeps responding to high incidence of misconduct in retail OTC derivatives sector

The Australian Securities & Investments Commission (ASIC) has earlier today tabled its Annual Report for the 2018-19 financial year in the Australian Parliament. The report, which is a record of ASIC’s activities and performance for the year to end-June 2019, indicates that the regulator continues to battle high level of misconduct in the retail OTC derivatives sector, which comprises the offering of various products, including margin Forex, binary options and contracts for difference (CFDs).

“We continue to respond to a high incidence of misconduct in the retail OTC derivatives sector, involving large client losses”, ASIC says in its report.

This year, the regulator continued to closely monitor this market and progressed a number of enforcement and administrative actions where it found breaches of the law. In April 2019, for instance, ASIC conducted an extensive information-gathering exercise of the licensed entities active in retail OTC derivatives, covering 18 areas. Information obtained is set to help ASIC address key themes and concerns in the sector.

The regulator publicly warned Australian issuers that they may be dealing with offshore investors illegally and to cease any non‐compliant activities, particularly given that many jurisdictions – such as China, Europe, Japan and North America – have restricted or prohibited the provision of certain OTC derivatives to retail investors. ASIC also worked to ensure that retail OTC derivatives providers are complying with foreign laws. The regulator says it has liaised with various foreign regulatory agencies on this issue.

Across the year progress was made in the strategic change program that began in early-2018. In 2018-19, there has been:

• a 20% increase in the number of ASIC enforcement investigations;
• a 51% increase in the number of enforcement investigations involving Australia’s largest financial institutions (or their officers, employees or subsidiary companies);
• a 216% increase in the number of wealth management investigations.

In terms of international cooperation, ASIC highlights its action against AGM Markets. In November 2018, the Australian regulator cancelled the AFS licence of retail OTC derivative issuer AGM Markets Pty Ltd and banned former director and Chief Executive Officer of AGM, Yossef Ashkenazi, from providing financial services for eight years.

ASIC found that AGM’s financial services business involved core elements of unconscionability and unmanaged conflicts of interest and followed a business model that disregarded key conduct requirements. ASIC also launched related civil proceedings.

AGM Markets’ conduct was connected to individuals and entities overseas, and significant information was obtained from foreign jurisdictions in the course of ASIC’s investigation. The regulator says it made nine requests for assistance to foreign agencies in this matter, including pursuant to the IOSCO Multilateral Memorandum of Understanding. The international assistance received by ASIC played a significant role in progressing this matter, the regulator explains.

ASIC also highlights its action against Berndale Capital Securities and its ex-director Stavro D’Amore. In November 2018, ASIC banned D’Amore from providing financial services for six years. The order was made after ASIC found that Mr D’Amore:

• was involved in contraventions of financial services laws by Berndale;
• is likely to contravene a financial services law;
• is not adequately trained, or is not competent, to provide financial services.

ASIC cancelled the AFS licence of Berndale on the same day. On December 5, 2018, ASIC obtained freezing orders from the Federal Court against Berndale, its associated entities and D’Amore, preventing them from selling or otherwise dealing with their property (including cash held with Australian banks) without ASIC’s consent. The orders remain in place.