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BFCSA: ASIC has products with 'ridiculous' leverage in its sights

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ASIC has products with 'ridiculous' leverage in its sights

Australian Financial Review Mar 27, 2019 5.15pm

Sarah Turner


The corporate regulator says it will ramp up its crackdown on providers of "highly risky" financial products that expose retail investors to "ridiculous" levels of financial losses – as soon as its powers are widened.

Australian Securities and Investments Commission senior executive leader for market supervision, Calissa Aldridge, told a conference in Sydney: "We are routinely seeing 500-to-one leverage.

"Essentially, that means that you invest $2000 and have $1 million exposure. For unsophisticated retail investors that's a ridiculous amount of exposure," she said.

Ms Aldridge was speaking on a panel discussion on market regulation with Reserve Bank of Australia assistant governor Christopher Kent, who was asked about his broad view on economic developments. "I think it's still a question of watch this space. The data has been a bit weaker in patches but it's in patches," he said.

Dr Kent also touched on the flash crash in foreign-exchange markets in January that briefly sent the Australian dollar reeling.  While it is still not completely clear what caused the crash, some of the blame has been laid at the feet of algorithms. However, Dr Kent said that in future, algorithms may have a part to play in containing such violent moves.

"It’s a possibility in time that people develop trading strategies, including algorithmic ones, which look for these large moves and see them as profitable opportunities," he said.

ASIC's Ms Aldridge said: "I think that we should expect there will be these types of crashes in all markets," with the global nature of markets, fragmentation, and increasing automation informing her view.  Flash crashes "have real consequences not just for wholesale markets but for retail markets," she said.

A potentially more important factor for mum-and-dad investors, however, will be ASIC's increasing focus on retail investors and over-the-counter derivatives. The regulator revealed in mid-2018 that it had concerns about practices in this area and Ms Aldridge underlined ASIC's ongoing scrutiny on Wednesday.

"These products are highly risky. We have seen lots of examples of retail investors losing significant sums of money  and we are really trying to target this on a range of fronts," she told the conference.

"So we're looking at poor conduct, we're looking at the products themselves and the attributes of products that are leading to losses – for example, excessive leverage."

ASIC has already cancelled licences, suspended licences, banned individuals and forced websites to remove misleading information from websites. "We are increasingly seeing false client testimonials," Ms Aldridge noted.

Still, she acknowledged that ASIC's response so far had been restricted by its limited powers to regulate this area of the markets. "At the moment it is very much 'whack a mole'. We don’t have the power to ban these products outright."

That could change, however, if a bill on product intervention makes its way through parliament. "When that comes through, we are seriously considering the attributes of these products and at what level we see the most significant harm," she said.

Other regulators do have limits on contracts for difference (CFDs) and other leveraged products, with margin foreign exchange a key area, she noted.

"We are looking at that. As soon as that power comes through, I think you should expect there will be a consultation from us," she said. "We continue to see the same harms and new players entering the market and these are the circumstances the bill is designed to address."



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