ASIC cracks-down on broker discounts, crypto and securities lending

Mike Taylor

Managing Editor/Publisher, Financial Newswire

1 September 2022

Broker discounts to retail investors have been squarely targeted by the Australian Securities and Investments Commission (ASIC) which has gone so far as to warn licensees that they will be held accountable for the actions of authorised representatives acting as online brokers.

ASIC said it had seen a recent increase in the number of brokers offering securities trading and that in the face of recent market conditions having dampened retail investor activity, brokers had been seeking to offer retail investors high-risk products or services that might be unfair, inappropriate or result in poor outcomes.

Among the areas of broker activity being targeted by ASIC are securities lending to retail investors, zero or low-cost brokerage offers and crypto-asset trading.

The regulator noted that, in Australia, securities lending has generally been limited to institutional investors who have the size, scale and sophistication to understand and manage the risks.

Commenting on the situation, ASIC commissioner, Danielle Press said the regulator would intervene or take action where it saw unfair or inappropriate offers of securities lending arrangements to retail clients.

“Australian financial services (AFS) licensees may be liable for substantial civil penalties if they do not do all things necessary to ensure the financial services covered by their licence are provided efficiently, honestly and fairly,” she said.

“Securities lending is complex and may be difficult for retail investors to understand. Design features that may not be fair or appropriate include:

• bundling of securities lending with other services or automatic opt-in of clients to securities lending (i.e. clients are required to take active steps to opt-out)
• no pre-qualification or vetting of investors (e.g. based on experience, assets or income)
• a fee split that is heavily skewed in favour of the provider.

Press also cited crypto-asset trading noting that some brokers had or were seeking to offer the products alongside shares and other regulated financial products through their trading apps.

She said ASIC was concerned this might give investors a false sense of security, leading them to believe crypto-assets have the same protections as regulated financial products or that they might underestimate the risks.

“ASIC has also seen instances of brokers marketing products and services to retail investors with headline rates of ‘zero’ or ‘low-cost’ brokerage using various digital marketing practices.”

“We are concerned that ‘zero brokerage’ claims may not be true to label where the service is ‘bundled’ with other products or services that effectively subsidise brokerage and cause retail investors to take on additional risk.”