ASIC has made two interim stop orders preventing Trademax Australia Limited from opening trading accounts or dealing in contracts for difference (CFDs) or margin foreign exchange contracts (margin FX) to retail investors.
ASIC acted following concerns that Trademax failed to take reasonable steps likely to result in its retail product distribution conduct being consistent with two target market determinations (TMDs).
ASIC’s concerns related to Trademax’s reliance on an inadequate retail investor questionnaire for compliance with its obligations and a lack of other controls in Trademax’s onboarding process to assess whether clients are likely to be in its target markets.
ASIC considered that Trademax’s use of a poorly designed and inadequate questionnaire:
- did not adequately enquire into the prospective clients’ financial situation, risk tolerance and investment objectives to enable Trademax to adequately assess whether the prospective clients are likely to be in the target markets described in its TMDs for the complex, high risk, leveraged CFDs and margin FX products;
- did not adequately enquire into the prospective clients’ risk tolerance and technical understanding of CFDs over crypto assets to enable Trademax to adequately assess whether the prospective clients are likely to be in the target market described in its crypto TMD;
- had significant design flaws, including warning messages prompting clients to review their answers, allowing prospective clients to submit alternative responses so they would meet the target markets; and
- permitted retail investors two attempts to pass the questionnaire every 24 hours for an indefinite period and prompted prospective clients with a tick-box acknowledgement that they had certain attributes.
The design and distribution obligations require issuers and distributors of a financial product to take reasonable steps that will, or are reasonably likely to, result in distribution conduct relating to retail investors being consistent with the TMD for the product.
The interim stop orders are valid for 21 days unless revoked earlier. ASIC made the interim orders to protect retail investors from acquiring CFDs or margin FX from Trademax, where those products may not be suitable for their financial objectives, situation or needs. The orders do not prevent Trademax’s existing clients from varying or closing their CFD positions.
Background
On 6 September 2023, ASIC released Report 770 Design and distribution obligations: Retail OTC derivatives (), outlining how issuers of retail OTC derivatives are meeting DDO and highlighting areas for improvement, including their over-reliance on client questionnaires as a primary distribution filter and making greater use of available data to assist the distribution arrangements.
CFDs and margin FX are leveraged derivative contracts that allow a client to speculate in the change in value of an underlying asset, such as foreign exchange rates (in the case of margin FX), stock market indices, single equities, commodities or crypto assets.
ASIC’s product intervention order for CFDs strengthened consumer protections after reviews in 2017, 2019 and 2020 found that most retail clients lose money trading CFDs (refer ). In April 2022, ASIC extended this order for a further five years to 23 May 2027 (refer ).
To date, ASIC has issued 84 interim stop orders under DDO, including the order for Trademax. Of the 84 issued, 83 have either been lifted following actions taken by the entities to address ASIC’s concerns or the products have been withdrawn. One order remains in place.
Where firms are not doing the right thing, ASIC can take quick action under DDO to disrupt poor conduct and prevent potential consumer harm.
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