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ASIC Warns on “Significant Failures” in Retail OTC Derivatives Industry

The Australian Securities and Investments
Commission (ASIC) has issued a stark warning following
a recent surveillance program that identifying “serious
and widespread” compliance failures in the Australian retail OTC derivatives

ASIC says it has
observed a “material increase” in the number of Australian financial services
(AFS) licence applications from entities seeking to operate retail OTC
derivatives financial services businesses in Australia. In conjunction with
this trend, it says it has also identified increasing non-compliance by
existing AFS licensees with a number of their Australian regulatory

ASIC’s review
identified a “high degree of non-compliance” with seven key compliance risks

It says that over 70%
of AFS licensees reviewed demonstrated issues with three or more of the
seven compliance risks. In particular over 80% demonstrated issues with the
disclosure in their PDS or website; over 60% had undergone a change of control
(with some issuers exhibiting multiple changes of control in a 12-month period)
and 85% of those entities had failed to notify ASIC as required; over 50% had
not adequately complied with their financial reporting obligations.

In addition, ASIC says
that around 50% required additional detailed assessment to determine whether
they adequately complied with their NTA (net tangible assets) requirements; and
nearly 30% did not appear to be providing any financial service under their AFS
licence, despite some being licensed for a number of years.

“Many of the
compliance concerns we detected were contraventions of well-established
regulatory requirements or non-compliance with fundamental AFS licensing
obligations,” ASIC says. “We also observed a significantly 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 for their Australian businesses.”

In total, ASIC says it
obtained more than 150 regulatory outcomes as a result of its review,
including, recapitalisation to comply with financial requirements; improvements
to defective disclosure; submission of overdue financial reports; corrections
to registry and AFS licence information; improved supervision of authorised
representatives; rectification of compliance failings; cessation of unlicensed
conduct; and AFS licence suspensions and cancellations.

“This report
highlights some serious compliance failures in this industry,” says ASIC commissioner
Cathie Armour. “We expect industry to take note of our findings and proactively
remediate any areas requiring improvement to ensure they have adequate and
enduring compliance measures to fulfil their regulatory obligations.

“The report also
provides a prudent warning to investors,” she continues. “We hope 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.

“As can be seen from
our surveillance findings and announcements, many of these investment products
may not be appropriate for average investors, who are often caught out by the
complexity and may not understand the heightened risk profile,” Armour adds.

Twitter @lamboPnL


Colin Lambert

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