Market Integrity Update - Issue 123 - February 2021
- Retail market conduct issues arising from COVID-19
- Recent volatility in US securities
- Professional indemnity insurance requirements
- Halifax Investment Services licence cancelled
We advise market intermediaries to be vigilant to a recent rise in imposter bond investment offers targeting local investors.
Scammers pretend to be associated with well-known domestic and international firms, including financial services providers, and offer high-yield bond investments to investors. We’ve recently become aware of two such scam operations targeting investors in Australia and others in countries such as the United Kingdom.
In many cases, the scam occurs after the investor completes an online inquiry form expressing interest in receiving investment advice, often via a third party or comparison site.
Some of the common tactics deployed by scammers include:
- sending professional looking fake prospectuses with unrealistically high returns
- falsely stating the bonds are issued by prominent firms when this is not true and there is no underlying investment
- falsely claiming investor funds will be pooled to invest in government bonds or the bonds of companies with AAA credit ratings
- falsely claiming the purchase price of the bonds is protected under the Commonwealth Governments Financial Claims Scheme
- using contact details gathered online through fake investment comparison websites to call people and pressure them to invest or risk ‘missing out’.
When individuals decide to invest in these bogus bonds, they are directed to pay funds into a bank account. It can be difficult to recover money lost to scams, especially if the scammers are based outside Australia, and the funds may be permanently lost.
- Read the media release
IOSCO’s Retail Market Conduct Task Force, which ASIC jointly co-chairs with the Central Bank of Ireland, has reported on key observations of retail market conduct risks caused or exacerbated by the COVID-19 pandemic (COVID-19). Some of these include the:
- unique market environment stemming from the pandemic
- impact on firm and investor behaviour
- common drivers of retail misconduct.
Commissioned by the IOSCO Board, the Retail Market Conduct Task Force Report: Initial Findings and Observations About the Impact of COVID-19 on Retail Market Conduct report responds to the economic uncertainty global markets experience during crises. It also supports IOSCO’s work in enhancing investor protection and promoting investor confidence in the integrity of markets.
The report identifies several common themes experienced during COVID-19 which highlight the vulnerabilities and risks for retail investors, market participants and regulators including:
- high market volatility
- heightened financial and psychological stressors
- social distancing and remote work requirements
- an increase in aggressive advertising, online marketing and digital offerings of financial products that may target vulnerable investors.
The report is timely given the continued growth of retail investors in the market and the significant role of social media (e.g. Reddit) on trading decisions.
- Read the media release
We continue to monitor and assess the recent volatility in certain US securities and whether a similar situation could arise in the Australian market.
Retail investors used social media (e.g. Reddit group WallStreetBets) to ‘short squeeze’ NYSE-listed GameStop to counteract short positions held by hedge funds. This large amount of retail buying saw GameStop’s share price rise by around 2,000% in January 2021, before losing most of these gains in early February.
We think this type of short squeeze is unlikely to occur to the same extent in Australia due to our regulatory framework, controls that the Australian exchanges have in place and market practice.
We’re unlikely to see this occur to the same extent in the Australian market due to:
- lower levels of shorting of ASX stocks (generally under 15%, compared to the reported 140% in GameStop)
- naked short sales are prohibited in Australia – most short sales need to be covered (e.g. by stock lending) prior to the short sale. This compares to a more flexible ‘locate’ requirement in the United States
- payment for order flow isn’t allowed, and brokerage isn’t free
- options activity in Australia is significantly lower than the United States – limited to several (primarily large cap) stocks. Only 25% of the top 200 most shorted stocks have exchange traded options
- continuous disclosure laws mean more intraday company announcements
- listing market operators, like ASX, have the ability to impose trading halts and seek explanations for significant unexplained price movements – this helps to moderate extreme price movements
- extreme price movements may trigger the extreme trade ranges in the market integrity rules, which act like a circuit breaker in the Australian market.
Market participants should remain alert to this type of activity and consider implications for their controls and obligations.
We remind retail investors who use social media in an attempt to ‘pump and dump’ shares and engage in market manipulation that they may breach Australian financial services laws.
Our market surveillance team continually monitors market movements (in real time) and we’ll take enforcement action where we identify misconduct.
Australian financial services (AFS) licensees that provide financial services to retail clients are reminded of the requirement to have professional indemnity (PI) insurance if we haven’t approved your alternative compensation arrangements. Market participants also must maintain an adequate level of PI insurance cover under the ASIC market integrity rules.
Under section 912B of the Corporations Act 2001 (the Act), AFS licensees must have arrangements for compensating retail clients for losses they suffer as a result of a breach by the licensee or its representatives of their obligations in Chapter 7 of the Act. The arrangements must either be adequate PI insurance, or alternative arrangements we’ve approved. It is the responsibility of the AFS licensee to undertake its own assessment of what is ‘adequate’ insurance for its business.
We’re aware that some AFS licensees may be experiencing difficulties in obtaining adequate PI insurance. As soon as practicable, we recommend you seek renewal of your existing cover, or submit an application via the ASIC Regulatory Portal for approval of alternative arrangements before the expiry date of your existing cover. Our preference is to receive individual applications for alternative arrangements allowing enough time to obtain the required PI insurance if your arrangements are not approved.
Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees sets out how we administer the compensation requirements in section 912B. See, in particular, Section C and Section D of the guide. AFS licensees should cease providing retail client services until they are able to meet the requirements of section 912B.
We’ve cancelled the Australian financial services (AFS) licence of Halifax Investment Services Pty Ltd (in liquidation) (Halifax) from 8 January 2021.
The terms of the AFS licence cancellation allow Halifax to continue on a limited basis until 7 January 2022, but only for the purposes of:
- ensuring that clients of Halifax continue to have access to an external dispute resolution scheme
- ensuring that Halifax continues to have arrangements for compensating retail clients, including the holding of professional indemnity insurance cover
- providing financial services to retail or wholesale clients of Halifax limited to the termination of existing arrangements with clients.
These conditions have been put in place so that the cancellation does not adversely affect past or current clients.
The company has the right to seek a review of our decision at the Administrative Appeals Tribunal.
- Read the media release