The Australian Securities and Investments Commission (ASIC) has identified a high degree of non-compliance in the retail over-the-counter (OTC) derivatives industry, measured against seven compliance risks categories.
The corporate regulator highlighted “serious and widespread compliance failure” in the OTC derivatives industry which is considered by ASIC as ‘often difficult to understand, even for experienced investors’.
Due to a material increase in the number of the Australian Financial services (AFS) licence applications from entities looking to operate retail OTC derivative financial services, ASIC assessed a large proportion of the AFS-licensed retail OTC derivatives industry and found that over 70 per cent of AFS licensees had demonstrated issues with three or more of the seven major compliance risks, including problems such as:
- Disclosure in their product disclosure statements (PDS) or website;
- Compliance with their financial reporting obligations and their net tangible assets (NTA) obligations;
- Neglecting to provide any financial service under their AFS licence; and
- Failure to notify ASIC in the event of a change of control.
Additionally, ASIC also noted a significant high number of smaller, foreign-owned or foreign-controlled AFS licensees demonstrating either a lack of awareness or understanding of their Australian regulatory obligations, or reluctance to invest resources in meeting compliance obligations of their Australian businesses.
According to ASIC’s commissioner, Cathie Armour, the report also provided “a prudent warning to investors” as the investment products may not be appropriate for the “average investors” due to their complexity and the heightened risk profile of these products.
“We hope that the report will encourage them to be more aware of the risks of these types of products as well as improve their understanding of the standards of practice they should expect from retail OTC derivative providers,” she said.
