Following a review of online brokers — which found an array of weaknesses in disclosure, client onboarding practices and product development — the Australian Securities and Investments Commission (ASIC) is warning retail investors about firms pitching risky, complex investment products.
Between March and June, the regulator conducted a compliance review of brokers that offer risky products to investors — such as short-dated options, futures and fractional shares.
That exercise revealed deficiencies in firms’ efforts to define how risky products meet clients’ needs; weaknesses in client onboarding procedures, including firms providing investors with unlimited attempts to pass onboarding quizzes; and insufficient disclosure of the risks and costs of investing.
“Online brokers are targeting retail investors with complex or high-risk products without clearly disclosing their risks or conducting proper onboarding,” the ASIC said.
Additionally, some of these firms are using tactics such as free trading and incentives — including cash back and airline reward points — to drive retail trading, it noted.
In the wake of that review, the ASIC said one firm has exited the market, several others have beefed up their compliance practices, and that it’s considering additional enforcement action too.
“Entities offering complex or high-risk products must ensure their products are distributed to the right target market, not only at onboarding but throughout the client relationship,” said ASIC commissioner, Simone Constant, in a release.
“The products are complex but the responsibilities are simple — they require effective product governance, including appropriate onboarding, ongoing client monitoring and clear disclosures that explain the real risks and costs involved,” she added.
Additionally, Constant stressed that complex products “are unlikely to be suitable for many retail investors, and firms must therefore ensure their target markets are appropriately and narrowly defined.”
The regulator cautioned retail investors against investing in products they don’t understand and may not be suitable.