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March 29, 2021 - Back in October 2020, Australian Financial Markets regulator ASIC announced a product intervention order imposing conditions on the issue and distribution of CFDs to retail clients. ASIC has today confirmed that these conditions now take effect.
According to the official statement by the regulator, "The order strengthens protections for retail clients trading CFDs after ASIC found that CFDs have resulted in, and are likely to result in, significant detriment to retail clients."
"ASIC’s order reduces CFD leverage available to retail clients and targets CFD product features and sales practices that amplify retail clients’ CFD losses, such as providing inducements to become a client or to trade. It also brings Australian practice into line with protections in force in comparable markets elsewhere."
The maximum CFD leverage available to retail clients will range from 30:1 to a 2:1, depending on the underlying asset class. Before now, a retail investor’s CFD exposure could be as much as 500 times their original outlay.
From today, ASIC’s product intervention order will:
• restrict CFD leverage offered to retail clients to a maximum ratio of:
○ 30:1 for CFDs referencing an exchange rate for a major currency pair
○ 20:1 for CFDs referencing an exchange rate for a minor currency pair, gold or a major stock market index
○ 10:1 for CFDs referencing a commodity (other than gold) or a minor stock market index
○ 2:1 for CFDs referencing crypto-assets
○ 5:1 for CFDs referencing shares or other assets
• standardise CFD issuers’ margin close-out arrangements that act as a circuit breaker to close-out one or more a retail client’s CFD positions before all or most of the client’s investment is lost
• protect against negative account balances by limiting a retail client’s CFD losses to the funds in their CFD trading account, and
• prohibit giving or offering certain inducements to retail clients (for example, offering trading credits and rebates or ‘free’ gifts like iPads).
In the original announcement back in October 2020, ASIC referenced reviews in 2017, 2019 and 2020 that found that most retail clients lose money trading CFDs.
“During a volatile five-week period in March and April 2020, the retail clients of a sample of 13 CFD issuers made a net loss of more than $774 million. During this period:
• over 1.1 million CFD positions were terminated under margin close-out arrangements (compared with 9.3 million over the full year of 2018)
• more than 15,000 retail client CFD trading accounts fell into negative balance owing a total of $10.9 million (compared with 41,000 accounts owing $33 million over the full year of 2018). Some debts were forgiven.
ASIC Commissioner Cathie Armour said ‘We will closely monitor compliance with the product intervention order and won’t hesitate to take appropriate action to enforce the order.’
‘We are also paying careful attention to changes in CFD providers’ reported holdings of retail client money and any mis-classification of retail clients as wholesale clients, which would risk denying them important rights and protections. Protecting retail investors from harm, particularly at a time of heightened vulnerability, is a priority for ASIC,’ Commissioner Armour said.
The maximum penalty for a contravention of a product intervention order is five years’ imprisonment for individuals and substantial pecuniary penalties of up to $555 million for corporations.
If a court finds that a person has contravened a product intervention order, a retail client may recover the amount of loss or damage suffered because of the contravention.
The product intervention order will remain in force for 18 months, after which it may be extended or made permanent.
In August 2019, ASIC released a Consultation Paper seeking feedback on proposals to use its product intervention power to address significant detriment to retail clients resulting from over-the-counter (OTC) binary options and CFDs, garnering over 400 responses from consumers, consumer groups, product issuers, industry bodies and other stakeholders. Following the consultation, on 23 October 2020, ASIC made a product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients., which is the order that comes into force today.
ASIC’s proposal to ban the issue and distribution of binary options to retail clients is still under consideration and a decision has not yet been made.
