ASIC stresses concerns about retail FX regulatory arbitrage

Maria Nikolova

ASIC will consider whether breaching overseas law is consistent with obligations under Australian law to provide services ‘efficiently, honestly and fairly’.

Less than two months after the Australian Securities & Investments Commission (ASIC) warned that some Australian financial service (AFS) licensees may be taking advantage of the latest regulatory developments and are abusing the scope of their AFS licenses, the regulator has once again voiced its concerns about regulatory arbitrage.

In a speech at the Australian Regulatory Summit 2019, Commissioner Cathie Armour today said there is a risk of such regulatory arbitrage in the retail OTC derivatives market.

The Commissioner noted that the retail OTC derivatives sector in Australia is an active and growing market with an annual turnover of $11 trillion and over 450,000 investors. The products offered by retail OTC derivatives issuers in Australia include binary options, margin foreign exchange and contracts for difference.

Last year, ASIC published results of a review that found client losses in retail OTC derivatives trades were high, with the percentage of unprofitable traders being up to 80% for binary options, 72% for CFD traders and 63% for margin FX traders.

Regulators in many jurisdictions – Europe, Japan, North America and China, have restricted or prohibited the provision to retail investors of certain OTC derivatives. As there are not similar restrictions in Australia, there is a risk of regulatory arbitrage.

In April this year, ASIC publicly warned Australian issuers that they may be dealing with overseas investors illegally and to cease any non-compliant activities immediately. There may be consequences overseas for potential breaches of overseas law, but in any event, ASIC will consider whether breaching overseas law is consistent with obligations under Australian law to provide services ‘efficiently, honestly and fairly’. ASIC is also concerned some AFS licensees may be making misleading or deceptive statements about the scope or application or effect of an AFS licence.

One of the companies that has already taken action in response to ASIC’s warnings is Hong Kong-focused retail FX broker KVB Kunlun. As a holder of the Australian Financial Services License, the Group received a letter from Australian Securities and Investments Commission (ASIC) dated April 18, 2019 addressed to its licensees. The Letter reminded licensees that they were obliged to comply with applicable laws of foreign jurisdictions, and recommended that licensees should seek legal advice to ensure that the products and services they offer to their clients comply with applicable foreign laws.

Certain subsidiaries of KVB Kunlun hold Australian and New Zealand financial services licenses, and the online forex margin trading platform of the Group’s Australian and New Zealand subsidiaries is targeted towards, among others, ethnic Chinese. A detailed survey of the Group’s Existing Ethnic Chinese Clients will be conducted. This survey aims to identify anyone who is, or who may possible be, classified as a PRC domestic client. Any person identified as an actual or potential PRC domestic client will then be disengaged as soon as possible.

In her speech today, Commissioner Cathie Armour said ASIC will continue to be active in the retail OTC derivatives sector.

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