The corporate watchdog has warned sellers of high-risk financial betting products – described by an Australian judge as “financial heroin hits” – to clean up their act and review the mass marketing of their products to people with limited financial markets knowledge.
The Australian Securities and Investment Commission said it was increasingly concerned that providers of financial derivative products had been allowing customers with limited knowledge of financial markets to make dangerous, high-leverage bets. The regulator said its crackdown would also target issuers of cryptocurrency derivatives – products that derive a value from actual cryptocurrencies.
The regulator recently sued eToro, a leading sponsor of the Australian rugby’s Wallabies, in part because it was advertising its highly complex financial betting products at sporting events and running highly visible ad campaigns. eToro is reviewing the allegations and has said the case relates to a policy no longer in effect.
eToro is a major Rugby Australia sponsor.Credit: Tiffany Hagler-Geard
The high-risk products in ASIC’s sights are known in the market as “contracts for difference”. They allow punters to bet that a share price or the price of a commodity like gold will go up or down over a set period. Some groups also sell contracts for bets on the price of a cryptocurrency. The products are sold with leverage so that a holder can turn a $5 bet into a $500 windfall if their bet is correct. But it also works the other way, meaning punters who put in $5 and lose owe their broker $495.
ASIC cracked down on contracts for difference in 2020 after reviews found that 80 per cent of all customers lost their money on the products. The crackdown lowered the leverage available for sales to ordinary customers to an upper limit of 30 times. The ultra-high leverage products of 100 times or as much as 300 times remained on sale to ‘wholesale’ or professional investors.
In 2021, this masthead revealed some groups were offering their customers high-leverage products if they passed a questionnaire to become “professional investors” and chose to remove their consumer rights.
ASIC brought in new rules across all financial products two years ago – called design and distribution obligations – that require financial services groups to ensure their products are designed and distributed with clear consideration of the objectives, financial situation and needs of consumers and retail investors being targeted.
“Product issuers should not simply rely on client questionnaires to meet their distribution obligations. These are high-risk products which mean a range of controls [is] likely needed to ensure they get to the right consumers in their ‘niche’ target markets,” said ASIC commissioner Karen Chester.
“We are also concerned to see mass-market advertising of these high-risk financial products. Absent robust distribution controls, such mass advertising, is likely to see these products end up in the wrong hands – consumers they are not intended or appropriate for,” said Chester.
ASIC said more than 60 Australian financial services licensees offer complex, high-risk over-the-counter derivatives to retail clients in Australia, such as CFDs, crypto derivatives and other novel derivative arrangements.
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