The absolute hypocrisy of ASIC – Op Ed

One of the results of supposed progress over the past few decades in civilized Western countries has been extensive government rulings which seek to protect the dignity and interests of well-meaning groups regardless of their background or gender.

We have seen numerous anti-discrimination laws invoked which have preserved the interests of all mankind within the workplace and general society, allowing a genuine meritocracy to flourish.

This is all very well, however one area within which discrimination certainly seems to be alive and well is between government authorities and entire industry sectors.

It is not acceptable to discriminate against people on creed, gender or culture, but it definitely appears that it is quite standard practice for an official government to discriminate against an entire business sector for absolutely no reason whatsoever, with no consequences.

The publication today of the Enforcement Report for the period July to December 2019 by Australian financial markets regulator ASIC is an absolute depiction of hypocrisy and highlights the Australian government’s irrational disdain for the FX and CFD industry, one of the most highly respected retail FX business environments in the world and a massive employer of highly skilled people and revenue generator for Australia’s economy.

This report, which details which companies were subjected to enforcement actions, which individuals were censured and in some cases sentenced, for financial markets malpractice across all sectors from retail insurance and banking to electronic trading and stock market activities, is a regular boast by the Australian government, which publishes it every six months, with an overview of how many people or companies they have prosecuted via criminal proceedings and enforceable undertakings.

The period between May and December last year is a particularly important one for our FX and CFD in Australia, largely because that was the time during which ASIC began to show that it was serious about decimating the retail OTC derivatives business for absolutely no reason whatsoever.

The clamor began in August 2019, when I made a point that ever since Australia’s financial markets regulatory authority ASIC began to put a stop to its license holders activities with overseas retail clients, which as far as Australian brokers had been concerned, that meant largely networks of retail traders referred to Australian brokers by introducing brokers in China and surrounding Asia Pacific region nations, a massive kneejerk reaction began to place.

The reactive measures by certain large brokers in Australia has been to take their business to offshore islands, which as all those who know me well will already know, I consider to be a very retrograde measure.

This came at the end of a few years of vocal disdain by ASIC against what it terms as “margin FX brokers”. We have seen in previous enforcement reports actual official statements from ASIC officials saying that they do not want to encourage the “margin FX brokerage business” in Australia, alluding to possibilities that these officials may go up against the entire industry at some point.

So why has the hypocrisy now come to its highest point?

Looking at the report that was issued today, ASIC proudly demonstrates the enormity of regulatory fines against large financial institutions – largely Tier 1 banks, imprisonments of responsible officers in various mainstream financial services positions and censuring of different firms in different sectors.

However, not one of these relates to an FX or CFD company, its officials, management or staff.

Around five years ago, ASIC began to intentionally slow down the processing of AFS licenses to FX and CFD brokerages applying to operate as an Australian entity serving retail clients, yet issued licenses quicker than lottery tickets on a trailer park to other financial services firms such as insurance brokerages and mortgage advisors, yet the FX and CFD firms have behaved in a far more orderly fashion than most other sectors in Australia according to the facts and figures.

Our industry’s highly astute compliance and regulatory technology sector has worked tremendously hard to ensure good quality execution, infrastructural precision, proper market integration, pricing accuracy and reporting quality – all of which is monitored in real time format by ASIC’s now ten year old surveillance system which was manufactured by First Derivatives and conducts permanent minute-specific checks on all FX brokers in Australia.

Yet ASIC continues to demean one of Australia’s proudest achievements in the financial services and electronic markets business.

As I mentioned, the rot started in August last year, which is almost at the beginning of the period reported in today’s ASIC report.

That rot gave rise to my consensus that ASIC was unlikely to emulate the European regulations in their entirety for two reasons, those being that ASIC is a regulatory authority that genuinely understands the FX and CFD industry properly, a facet that cannot be said of many other regulatory authorities worldwide, and perhaps more importantly, that ASIC has begun what can only really be described as a ‘clampdown’ in a completely different manner to that exercised by ESMA two years ago.

However, understanding our industry properly has not led to a good synergy between it and the brokers, but an unfounded one-way animosity.

During interaction with Australian FX industry leaders over the past two years and certainly since the implementation of MiFID II in Europe, FinanceFeeds has been able to glean from opinion among senior executives that ASIC may potentially follow suit in terms of restructuring the means by which OTC trades are executed, reported and sold to retail customers, many of whom considered that leverage restrictions would be part of that remit.

Indeed, the speculation was correct and in August ASIC has released a very detailed proposal in which the regulator demonstrates its clear intention to restrict the methods by which OTC CFDs are sold.

At that time, spot FX was not covered under the proposals, as ASIC has made its stance clear that, as far as regulatory research is concerned, its officials believe that a very high percentage of retail clients have been closed out of positions by their CFD provider automatically at low margin levels and CFDs are, just a in the United Kingdom, a huge part of Australia’s electronic trading industry.

The proposals differed tremendously from the MiFID II leverage and trade reporting stipulations in Europe, however the outcome is likely to be very similar in that leverage will be curtailed.

Australian retail FX and CFD brokerages are among the highest quality in the world, and are led by extremely experienced senior executives who have created a ‘halo effect’ within the entire industry globally in that most retail FX firms look to Australia as a bastion of success and good business ethic, and rightly so.

Many brokers in Australia have gained vast business via established networks of introducing brokers and affiliate partners across the nearby and very lucrative Asia Pacific region, largely due to a combination of perceived quality and Western business ethic by money managers and introducing brokers in Asia which combines with a close and well developed business relationship between Australia and the APAC nations, and the ability for clients to trade with 1:500 leverage whilst under the respectable auspices of ASIC which conducts real time surveillance on brokerages and has a technologically advanced approach to our very modern business sector.

Additionally, the world’s retail sector and its client base knows that Australian banks, infrastructure and business ethics are world class, with very few issues with retail firms, and those which have contravened being dealt with very severely by ASIC in the same way that the NFA and CFTC in North America censure firms, that being with a wind-up order and restitution to clients.

It was always such a good combination; leverage at 1:500 which is how the investors (not traders, investors), in China like it, in a very well organized package that comes with proper leadership, first class business and technological infrastructure and astute regulation.

ASIC had no reason to go down the route it has taken, and it certainly appears to the analytical eye that ASIC officials realize that too, especially considering the backtracking which took place recently when the regulator issued letters to all companies under its auspices to desist from onboarding clients from outside Australia, and subsequently stated that this matter may be revisited.

The new proposals, however, are somewhat concrete and are very stringent. Where they differ from European regulations is that whilst leverage restrictions on CFDs are central to ASIC’s remit which does indeed emulate that of Europe, cross-border sale of instruments is likely to be banned for good, decimating the well developed Chinese and South East Asian IB networks that many Australian brokers have made their core business and done extremely well from.

So whilst brokers in Australia began to genuinely experience concern over what could be a draconian measure that would impact their business with the borders closing and leverage being dropped, who was the subject of regulatory censuring by ASIC?

That’s right. Not us.

ASIC’s blatant style of naming and shaming is present as usual in today’s for the last six months of 2019, and usually I have come to understand the pattern of ASIC’s publication style in that ASIC usually makes ‘case studies’ as part of these reports, focusing on sectors that it has a grudge against.

In the aftermath of the collapse of GTL Holdings which left meat pie and egg on the face of the regulator, which is why it then went absolutely full steam ahead in showing that it can close down FX brokers and prosecute executives for much smaller transgressions than those in the banks or mainstream financial services sector.

Almost ten years ago, GTL stole over $3 Million dollars from a client called Mahmood Riaz, that ASIC had been warned was wanted by Euro regulators for allegedly stealing 350 Million euros from clients. ASIC’s reply was that he was never convicted and so confirmed to their good fame and character test.

This became a bugbear for ASIC which gave the impression that it had to prove a point by going for the neck of the FX and CFD industry thereafter.

However, looking at the report which covers enforcement activity in the last six months of 2019, NOT ONE FX OR CFD firm is mentioned, yet the regulator was busy publishing proposals to decimate the industry, whilst banking bandits and share trading simpletons ran amok.

One such example given by ASIC for this period invloved a bank related incident in November 2019, in which Western Sydney National Australia Bank Limited (NAB) branch manager Mathew Alwan was sentenced to 12 months imprisonment to be served by way of an intensive correction order for making false and misleading statements to NAB about 24 home loan applications.

Mr Alwan pleaded guilty after he told NAB that an introducer had referred borrowers to make loan applications. In reality, the NAB introducer was Mr Alwan’s uncle, operating under the business name ‘Suit Club’.

In delivering the sentence, Magistrate Atkinson remarked that the Royal Commission had made very strong statements about the need for accountability and strong general deterrence, so that people in the industry understand how important it is to comply with the regulations.

ASIC previously permanently banned Mr Alwan from providing financial services.

Another trumpet-blowing boast by ASIC details how Westpac bank was ordered to pay $9.15 million penalty for 22 contraventions of the Corporations Act.

Yes. You read it right. 22 contraventions of the Corporations act, and a huge bank gets a tiny fine and is allowed to carry on trading. If that was one tiny issue such as an FX brokerage having $999,999 in capital adequacy requirement instead of $1 million, or a one day late filing of trade data, they’d be shut down and the gray suits would be sharpening their pencils ready to close down the entire sector.

In this case with Westpac, On 19 December 2019, the Federal Court of Australia ordered the bank to pay a penalty of $9.15 million for 22 contraventions of s961K of the Corporations Act, and to pay ASIC’s costs of the proceedings.

The court case related to poor financial advice provided by a former Westpac financial planner, Sudhir Sinha, in breach of the best interests duty and related obligations under the Corporations Act. Westpac is directly liable for these breaches because the law imposes a specific liability on licensees for breaches by their financial advisers.

In its decision, the Federal Court found Mr Sinha failed to act in the best interests of his clients, provided inappropriate financial advice and failed to prioritise the interests of his clients.

So there you go. Westpac writes a check which is equivalent to you or I writing a check for $1 and then carries on as normal.

Yet this is a major transgression which is mentioned on ASIC’s report for the months during which it was busy writing proposals to wreck our industry for no reason.

ASIC handed a petty 300 hour community service order to stocks and shares trader Benjamin Amzalek for his part in transactions that had or were likely to have had the effect of creating an artificial price for trading in shares of Precious Metal Resources Limited (PMR) on the Australian Stock Exchange.

300 hours of picking up discarded kangaroo burger takeaway boxes and empty Fosters lager cans from Bondi Beach for this, yet our esteemed professionals face getting their entire client bases cut off for absolutely no reason whatsoever.

Over the last year, whilst large publicly listed retail brokerages in the Northern Hemisphere such as IG Group and Plus500 showed signs of extreme difficulties in making headway financially, Australian firms such as Pepperstone and IC Markets literally romped home with gigantic profits, largely due to their ability to provide the absolutely desirable package to massive Chinese and South East Asian partner networks.

The cross-border curtailing has put an end to this, and to that effect, has resulted in some Australian firms heading to offshore islands such as the Seychelles (!!!) instead of restructuring their business by using the massive revenues gained from China to be able to abide by the regulations and appeal to Western and domestic market customers. With revenues such as $500 million per month in some cases, there is no reason why some of that cannot be reinvested to make the company a rival to Hargreaves Lansdown.

The proposal issued in August last year was lengthy and detailed. Leverage was on the top of the agenda, however before everyone runs for the hills l still maintain that we should all take stock of previous events here.

In 2011 when the Japanese FSA reduced leverage on OTC derivatives in Japan, the world’s most populous market with FX traders – Japan’s retail FX sector represents 35% of all international retail FX order flow, all processed by Japanese companies – everyone in the world thought Japanese traders would seek offshore, restriction-free companies and that massive giants doing over 1 trillion dollars a month in notional volume would cease to operate.

This did not happen, and indeed the contrary did. Japanese traders actually traded even more, and deposited more margin capital into the brokers, strengthening the assets under management of Japanese brokers and stopping any large numbers of client accounts being zeroed due to risk created by high leverage in a volatile market.

With that in mind, the Australian halo effect has been earned via very hard work on the part of Australian brokerages, therefore it is unlikely that customers would eschew that and go to an offshore firm, especially as many people in that region know full well what offshore firms with no regulations are like, as APAC has been a huge target for them over the years, usually with disastrous results.

It is rare for me to use such language publicly, especially in front of the executives in an industry which I am here to support and have worked within for 29 years, however here is my opinion.

This behavior by ASIC is disgusting. We must stand strong and adapt and continue, and not allow Australia’s highly well organized electronic trading sector, and the astute leaders who put it where it is today and have contributed tremendously to Australia’s diversified economy, and given the opportunity to global traders to have quality execution and trading environments that are well respected, to be decimated by a grudge.

Illegitimi Non Carborundum.