Binance, IG, Pepperstone, Saxo and others pay $17.4M compensation
Australia’s corporate regulator has overseen the payment of $17.4 million in compensation to over 2,000 retail clients. This action comes in response to breaches of financial services laws by eight retail over-the-counter (OTC) derivative issuers.
One particular aspect under review by the Australian Securities and Investments Commission (ASIC) was the classification of clients into retail and wholesale investors.
The bulk of this compensation stems from issues related to leverage ratio limits and client misclassification, particularly in contracts-for-difference (CFD) trading. In a media release, ASIC disclosed that the Aussie arm of Binance accounted for a substantial portion of this amount, paying out $13.1 million to 523 clients for misclassification issues.
Binance’s missteps in client classification deprived these retail clients of essential consumer protections during their OTC derivative trading activities, the ASIC said. This resulted in compensation payouts totaling $7.8 million in May and June 2023, followed by an additional $5.2 million in September 2023.
These payments were made to cover net losses and fees incurred from July 2022 to February 2023. The affected clients incurred losses on over 150,000 CFD trades across 100 different CFD instruments, exceeding the maximum leverage permitted by the product intervention order in the Corporations Act.
An interesting aspect of ASIC’s action is the self-reporting by seven CFD issuers of breaches related to exceeding leverage limits. The brokers involved in these breaches include Capital.Com Australia, CMC Markets Asia Pacific, Eightcap, IG Australia (IG Markets and IG Australia), Pepperstone Group, Saxo Capital Markets (Australia), and StoneX Financial (trading as City Index). These breaches were attributed to weaknesses in change management processes and manual errors.
ASIC Deputy Chair Sarah Court said, “OTC derivatives are complex, high-risk financial products. It is important that retail clients get the protections they are entitled to under the law when dealing with these risky products. These protections include the CFD product intervention order, design and distribution obligations, and access to external dispute resolution through the Australian Financial Complaints Authority.”
The compensation methodology employed by these issuers came under ASIC’s scrutiny, revealing that certain behavioral assumptions led to lower initial compensation payouts. Following ASIC’s review, four of the issuers subsequently paid over $2.8 million in additional compensation.
Earlier in April, the Australian regulator canceled Binance Australia’s derivatives license at the world’s largest cryptocurrency exchange’s own request.
The development came amid debate and controversy around Binance Australia after it closed derivatives positions of some users. The crypto exchange stated that it had incorrectly classified 500 Australian users as “wholesale investors.”
As per regulation, Binance was required to terminate services to these accounts immediately, but said it will fully compensate affected users for the losses incurred while trading derivatives.