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22-239MR ASIC warns brokers considering high-risk offers to retail investors
ASIC is warning brokers to be careful about or reconsider offering high-risk products and services to retail investors, such as securities lending, crypto-assets and offers of ‘zero’ or ‘low-cost’ brokerage - where the true cost is masked.
Since the onset of the COVID-19 pandemic, ASIC has seen an increase in the number of brokers offering securities trading. However, recent changes in market conditions have dampened retail investor activity. To broaden their revenue base, some brokers are seeking to offer retail investors high-risk products or services that may be unfair, inappropriate or result in poor outcomes.
Securities lending for retail investors
In Australia, securities lending has generally been limited to institutional investors who have the size, scale and sophistication to understand and manage the risks.
ASIC Commissioner Danielle Press said, ‘We will intervene or take action where we see unfair or inappropriate offers of securities lending arrangements to retail clients.’
‘Australian financial services (AFS) licensees may be liable for substantial civil penalties if they do not do all things necessary to ensure the financial services covered by their licence are provided efficiently, honestly and fairly’, she said.
Securities lending is complex and may be difficult for retail investors to understand. Design features that may not be fair or appropriate include:
- bundling of securities lending with other services or automatic opt-in of clients to securities lending (i.e. clients are required to take active steps to opt-out)
- no pre-qualification or vetting of investors (e.g. based on experience, assets or income)
- a fee split that is heavily skewed in favour of the provider.
With the growth in unregulated crypto-assets over recent years, some brokers have, or are seeking to, offer these products alongside shares and other regulated financial products through their trading apps. ASIC is concerned this may give investors a false sense of security, leading them to believe crypto-assets have the same protections as regulated financial products or they may underestimate the risks.
Commissioner Press said, ‘Crypto-assets are high-risk, volatile and complex. Brokers should think very carefully before offering crypto-assets through their share trading apps. The differences in risks and protections must be made clear to investors. We expect brokers to do the right thing by their clients.’
Misleading or deceptive statements about brokerage
ASIC has also seen instances of brokers marketing products and services to retail investors with headline rates of ‘zero’ or ‘low-cost’ brokerage using various digital marketing practices. Commissioner Press said, ‘We are concerned that ‘zero brokerage’ claims may not be true to label where the service is ‘bundled’ with other products or services that effectively subsidise brokerage and cause retail investors to take on additional risk.’
‘We strongly encourage retail investors to carefully consider what they are signing up for and make sure they understand the potential risks’, she said.
The law prohibits conduct that is misleading or deceptive, or likely to mislead or deceive, in relation to financial products or services. Brokers that claim to offer zero or low-cost brokerage should carefully consider whether they may be in breach of the law.
AFS licensee oversight of authorised representatives
Some online-only brokers operate as authorised representatives of an AFS licensee. We remind licensees of their obligation to have adequate resources to monitor and supervise their representatives. Licensees also need to carefully review and engage with the design of new products or services. ASIC will take action when licensees fail to meet these obligations: see 22-174MR.
Securities lending involves one party (the lender) transferring title of their securities to another party (the borrower) who provides collateral in the form of shares, bonds or cash. The borrower pays the lender a fee and is required to return the securities, or equivalent securities, to the lender on demand or at the end of the loan term.