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Short term credit, binary options and CFDs: ASIC names and shames initial targets of its product intervention powers
Date : 27 August 2019
Author/s : Daniel Goldberg, Ryan Doherty, Despina Bouletos
Type : Focus Paper
 

 

In April 2019, ASIC’s new product intervention powers came into effect.1 These powers enable ASIC to intervene on either a product-specific or market-wide basis when a financial product or credit product has resulted or is likely to result in significant detriment to consumers.


Since the powers became law, the press has speculated that contracts for difference (CFDs), binary options and certain insurance products would be amongst ASIC’s first targets.2 Similar powers granted to overseas regulators have been used in relation to binary options and CFDs on multiple occasions.


Short Term Credit

 

On July 9, ASIC announced a proposal to use its new product intervention powers to address significant consumer detriment in the short term credit industry.3 ASIC is particularly concerned about short term loans provided at high costs to vulnerable consumers, including those on low incomes or in financial difficulty. ASIC proposes to prohibit credit providers from providing short term credit and collateral services except in accordance with a condition which limits the total fees that can be charged. Feedback on the proposal closed on 30 July. ASIC is yet to indicate whether it will proceed with its proposal.


Binary Options and CFDs


On August 22, ASIC released a second proposal to use its new powers to address significant detriment to retail clients resulting from over-the-counter (OTC) binary options and contracts for difference (CFDs).4 ASIC has expressed apprehension about the high percentage of clients who lose money trading binary options and CFDs. ASIC is also concerned by certain features of these products, such as the high leverage offered in CFDs and the similarity of binary options to gambling products.


ASIC proposes to use its new powers to ban the issue and distribution of OTC binary options to retail clients and impose conditions on the issue and distribution of OTC CFDs to retail clients. The proposed conditions include:

 

  • imposing leverage limits;
  • implementing a standardised approach to automatic close-outs of clients’ CFD positions in margin calls;
  • protecting  retail clients against the risk of negative CFD trading account balances;
  • prohibiting certain trading inducements; and
  • enhancing transparency of CFD pricing, execution, costs and risks.


Feedback on the proposal is sought by 1 October.


Where to from here?


Market participants offering short term credit, binary options or CFDs should familiarise themselves with the details of ASIC’s proposals and monitor the position closely. If impacted, they should also, consider making submissions to ASIC in relation to the proposal.

 


1. Please see our previous focus paper, ‘Binary options and CFDs: first targets for ASIC’s new product intervention powers?’
2. ASIC to ban toxic products from August, James Frost, Australian Financial Review, 26 June 2019.
3. ASIC Consultation Paper 316, July 2019.
4. ASIC Consultation Paper 322, August 2019.

 

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