Live from iFX EXPO Hong Kong: The REAL reason why ASIC has been clamping down on retail FX brokers

The real reason that ASIC is ceasing to issue AFS licenses to FX brokers is down to criminals selling the wrong category of license to Chinese companies. We investigate in detail live from Hong Kong

Trade Chinese Yuan on the London Stock Exchange

Australia has marked itself out in recent years as a very attractive part of the world in which to establish a retail FX firm, or to open a branch of an established company from overseas.

Largely, the attractions appealed to the sensibilities of many astute executives in the electronic trading business, as they equated to a recipe for very sustainable business and a framework for growth.

A very stable financial markets economy, excellent business ethic, proximity to the prized Asia Pacific region – with lots of trade agreements with important nations such as Singapore, Hong Kong and China, English speaking population, and a very comprehensive and secure regulatory environment under the auspices of the technologically advanced and ultra-modern Australian Securities and Investments Commission (ASIC).

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.

What has this got to do with ASIC and its continued reluctance to issue AFSL licenses to FX brokers?

Here today at the Hong Kong Exhibition and Convention Center in Wan Chai, the second day of the iFX EXPO Asia 2017 FX industry conference is underway, produced by ConversionPros and industry news and research group Finance Magnates, where the focus for the senior executives from the People’s Republic and the Western world alike engage in detailed discussion that brings the all important subjects to the forefront for prominent institutional participants on each side of China’s borders.

Prior to the commencement of the day’s discussions, FinanceFeeds met with Sophie Gerber, By Sophie Gerber, Director, Sophie Grace Compliance and Legal, 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.

Sophie Gerber

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 recently 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 AxiTrader 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 today 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

Just recently, 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 AFSLs 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 licnese for brokerage, it was for superannuation or insurance, or another non-brokerage financial service” – Sophie Gerber, Director, Sophie Grace Compliance and Legal

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 regardles 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, Sophie Grace Legal

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 who gave a speech yesterday at the iFX EXPO during a panel discussion regarding challenges and opportunities for FX brokers in China, spends 70% of her work time dealing with this matter” she said.

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 tat 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, Sophie Grace Compliance and Legal

“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 conpanies they work for to say that as a responsible manager, they could be held liable. Instead they do their papework and reporting, and keep quiet.”


“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, Sophie Grace Compliance and Legal

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.

The end result is that ASIC dislikes them more and more, yet clients who want to run a proper license cannot get one.



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