Australia's financial regulator ASIC has announced it is "targeting" a broad market for over-the-counter (OTC) derivatives and other high-risk retail products, known as CFDs, after a review found there was room for improvement in meeting design and distribution obligations (DDOs).。

However, the regulator has not taken "drastic action" against CFD brokerage or marketing, such as Spain's recent ban on CFD marketing.。

ASIC Vice Chairman Karen Chester said: "ASIC is disappointed that a number of high-risk retail product issuers have made little change in meeting their design and distribution obligations.。"

The regulator said the launch of the DDO, now in its second year, marked a major shift towards results-oriented regulation.。Ultimately, it requires clear and timely consideration of the objectives, financial situation and needs of target consumers and retail investors when designing and issuing financial products。

More than 60 Australian financial services licensees offer complex, high-risk OTC derivatives such as contracts for difference (CFD), crypto derivatives and other derivatives to Australian retail clients。ASIC's review examined DDOs from a sample of issuers and followed earlier reviews conducted by ASIC in 2017, 2019, 2020 and 2022, finding that most retail customers were losing money when trading CFDs.。

The findings published in Retail OTC Derivatives (REP 770) outline how retail OTC derivatives issuers are meeting DDO requirements and highlight areas for improvement.。REP 770 calls on issuers to:

• Addressing over-reliance on customer questionnaires as primary allocation filters
  Review the large-scale marketing of its over-the-counter derivatives
  Increased use of existing data to assist in derivative product design, target market determination (TMD) and distribution arrangements

"Product issuers should not rely solely on customer questionnaires to meet their issuance obligations.。These are high-risk products, meaning a range of controls may need to be put in place to ensure they attract the right consumers in "niche" target markets.。If they end up reaching consumers outside their target market, the harm done will be high.。

"We are also concerned about mass market advertising for these high-risk financial products.。In the absence of strong distribution controls, such large-scale advertising can lead to these products ending up in the wrong hands, that is, consumers for whom they are unsuitable or unsuitable.。"Ms. Chester said。

Since March 2023, ASIC has taken regulatory action against five retail OTC derivatives issuers for DDO violations, issued 10 temporary stop-loss orders related to retail OTC derivatives, and is conducting further DDO-related investigations into high-risk product issuers.。ASIC recently launched its first design and distribution process in federal court against CFD issuer eToro and said it will continue to take appropriate regulatory action when DDO violations and consumer injury risks are identified.。

"We will not hesitate to take further action, from stop-and-frisk orders to court proceedings, especially as we see serious failings."。Our recent penalty proceedings against a CFD issuer are our third DDO-related civil penalty proceedings and are previous lawsuits against investment product distributors and credit product issuers.。We are considering a cease-and-desist order and are conducting several other DDO-related investigations, including one targeting high-risk investment products.。"Ms. Chester concluded。

The REP 770 findings build on what ASIC said earlier in the DDO's 762 report: findings in investment products。The report also describes how ASIC has extended its product intervention order, which strengthens protections for retail investors by banning binary options and imposing leverage limits on CFDs.。

Over the years, ASIC noted that it has taken strong and frequent regulatory actions to address the harm to consumers caused by offering OTC derivatives to retail customers, including:

• enforcement action
  AFS License Cancellation and Suspension
  Product Intervention Order
  Public warning
  Strengthening financial resource requirements
  Publications and Regulatory Guides

DDO requires financial product issuers and distributors to ensure that product design takes into account consumer needs and targeted distribution.。Financial products firms also need to monitor results and re-evaluate their product governance arrangements over time。The TMD is a mandatory public document (under the DDO) that sets out the categories of consumers (target markets) for which financial products may be suitable and matters related to product distribution and review。

To date, ASIC has conducted or is conducting risk-based oversight of buy-before-pay, credit cards, derivatives, investment products, microfinance and pensions.。Currently, ASIC has:

• Issued 82 temporary stop orders (9 issuers have since withdrawn 11 products from the market)
  Regulatory action against five retail OTC derivatives issuers for DDO violations (22-056MR, 23-127MR, 23-141MR, 23-040MR)
  Published the results of supervision on microcredit contracts (22-352MR), pensions (22-236MR) and managed investment products (23-115MR)
  Civil penalty proceedings for alleged DDO violations against Firstmac Limited (22-361MR), distributor of managed investment schemes, American Express Australia Limited (22-338MR), issuer of credit products, and eToro Aus Capital Limited, issuer of CFDs (23-204MR)。